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Consumer Spending Slowed in February, Report Finds


personal consumption expenditures price index (PCE), the Fed’s preferred measure of inflation, slowed down to 0.3 percent over the month of February in a consumer spending report released a few days ago. Compared to a rate of 0.6 percent in January, such a decline in PCE should indeed relay the message of diminishing inflation, a fact confirmed by February's Consumer Price Index (CPI) coming in lower than that of January as well. Meanwhile, core PCE, which omits food and energy prices that tend to be more volatile, showed a 4.6% increase in prices over the last year, down from 4.7% in January. This is contrast to CPI and core CPI, which reflect inflation rates of 6.0% and 5.5%, respectively, over the last year. Regardless of the adopted measure, however, the story of continued declines in the inflation rate may serve as another factor compelling the Fed to de-escalate with its rate increases ahead of the April 27 FOMC meeting. Although not reflected by February’s price reports, turmoil in the banking industry may force the Fed to halt future rate increases, with the federal funds rate currently resting at 4.83%. Doing so would follow market fears of turbulence, as Treasury yields fell from 3.98% on the eve of Silicon Valley Bank’s collapse to their current level of 3.55%.

Indeed, the case could be made that the Fed’s drastically expansionary monetary policy in the midst of the pandemic, followed by an equally as drastic increase in short-term interest rates, may have played a role in the swift prevalence of “junk debt” and unrealized losses across the banking sector, devaluing securities bought en masse by depository institutions while interest rates were seemingly glued to the zero bound.

Nonetheless, with inflation resting sizably above the Fed’s target of 2%, the message may be complicated when members of the FOMC meet to serve the Fed’s dual mandate of low unemployment and inflation. On the one hand, Oren Klachkin, lead U.S. economist at Oxford Economics, predicts to The Wall Street Journal that, “banking tumult - and tighter lending that might result - will influence business investments more directly than consumer spending.”

In spite of the gloom outlook though, stocks rallied on Friday following the release of the PCE report, although such a rally may partially owe to the prospects of the Fed pausing rate hikes as a response to such inflation numbers. Market participants are currently split on expectations for the Fed’s next decision, with 41.7% of those participating in the CME Group’s FedWatch predicting that the Fed will maintain its target range of 4.75 to 5%, as compared to 58.3% who expect the target range to increase to 5 to 5.25%. Regardless, with a few weeks to spare between now and the FOMC’s next meeting, only time will give us a better idea of what to expect from the Fed going forward.


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