To The Moon

MW All the ways Friday's PCE inflation and spending data may discourage investors

By Vivien Lou Chen

The Federal Reserve's preferred inflation gauge for February may end up looking out of date, while consumer spending could do little to improve overall weakness for the first quarter

The next major inflation update is set to arrive on Friday in the form of the Federal Reserve's preferred measure of price gains for February, and there a frew reasons why it may not give investors and traders much to cheer about for very long.The most obvious reason is Friday's report could end up looking stale on the inflation front. On Wednesday, President Donald Trump announced a 25% tariff on all cars not made in the U.S. and on certain automotive parts starting April 3, which now has analysts and traders reconsidering their expectations for future price increases in the months ahead. The White House is also expected to roll out a plan for reciprocal tariffs next Wednesday, which are designed to level the playing field between the U.S. and perhaps 10 to 15 other countries. In addition, the president is now threatening large-scale tariffs on Canada and Europe if they join forces in response to his trade war. Read: Trump announces 25% tariffs on finished cars and some parts. That's tough for the auto industry.

Friday's personal consumption expenditures price index for February is expected to show a monthly rise of 0.3% in the narrower core reading, which excludes volatile food and energy items, matching January's reading, according to the median estimate of economists polled by The Wall Street Journal. On a year-over-year basis, the PCE core rate is forecast to come in at 2.7% for February, a slight bump-up from the 2.6% rate seen during the first month of this year.

Central-bank officials favor the PCE report over the consumer-price index because it provides a better understanding of changes in consumer behavior. But even if Friday's data reflects some improvement on the consumer-spending side, this may not be enough to offset continued overall weakness for the first quarter.

"People are looking way past this report already and focusing on what these tariffs mean for future inflation. Everyone's forecast is already stale and people are wondering what this will look like six months from now," said Omair Sharif, founder of Inflation Insights, a research and analysis firm in Pasadena, Calif. "If Friday's data surprises to the upside, that will probably add to the anxiety over what future inflation will be," he said via phone. And if it matches expectations, the PCE report may be treated as old news.

Sharif sees the risk that core readings for February's PCE could produce a small upside surprise, by coming in at 0.4% on a monthly basis and 2.8% year over year. Information on both nominal and real spending will provide an idea of how the consumer is doing, he said. But "at the end of the day, first-quarter spending is looking challenged because real spending was down 0.5% in January" on a monthly basis, and February's spending figures "are not going to be enough to offset the weakness that we got."

As of Thursday morning, one important part of the financial market was moving in a manner that suggests building concerns about future inflation. The benchmark 10-year Treasury yield BX:TMUBMUSD10Y continued to inch above its highest level of the past month on what's known as bear-steepening trades, which tend to reflect traders' views on future price gains. Meanwhile, stocks DJIA SPX COMP were mixed. Fed-funds futures traders continued to hold out hope for Fed rate cuts this year, predicated on a slowing economy that should help bring down inflation.

Brian Bethune, an economist at Boston College, is one of the 75 people regularly surveyed by The Wall Street Journal. In his view, "consumer spending is decelerating and unraveling fairly quickly, and tomorrow's report should confirm that."

When looking at the first quarter as a whole, told MarketWatch Thursday, real consumer spending is significantly slowing down to 1% versus 4% for the fourth quarter of 2024, based on seasonally adjusted annual rates, and "that's even before we consider the pending tariff-related price increases that are likely to hit in April."

He added: "The dynamics for consumer spending are not good at all. We are in a major slowdown in consumer spending and the economy probably flatlined in the first quarter, so now we are transitioning into the second quarter with very little momentum."At Guidestone Funds in Dallas, which manages $24 billion in assets, Josh Chastant, a portfolio manager, said the market's expectations for February's year-over-year core PCE inflation rate are that it will be a "little hotter" than in January. But over the longer term, "the Fed has all the arrows in its quiver needed to get inflation back to 2%, and it is still something that it can hit."

-Vivien Lou Chen

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March 27, 2025 12:48 ET (16:48 GMT)

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