Inflation was stuck at 3% before the Iran war, a key Fed gauge shows
The PCE release points to stubborn inflation at the end of February, before the outbreak of the U.S.-Israeli war against Iran sent oil prices soaring
David Paul Morris / Bloomberg via Getty Images
A Bureau of Economic Analysis report released Thursday showed that real consumer spending edged up just 0.1% in February, following a flat reading in January. Stripping out food and energy, the core PCE price index — which the Federal Reserve relies on as its primary inflation gauge — was up 3.0% on a year-over-year basis and gained 0.4% compared with January.
The headline PCE price index rose 2.8% from February 2025 and 0.4% from January.
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The data arrive at a moment when Americans have been navigating persistent cost-of-living pressures that have reshaped everyday spending habits. University of Michigan consumer sentiment fell to 55.5 in March, its lowest reading of the year, and a Bankrate survey found that 54% of Americans said they were saving less for emergencies because of inflation or rising prices. Consumer prices overall are about 26% higher than they were in December 2019.
That pressure has pushed retailers and brands to reconsider pricing strategies. Target $TGT announced plans to lower prices on more than 3,000 items, and PepsiCo $PEP said it would cut prices on Lay's, Doritos, Cheetos, and Tostitos products by up to nearly 15%. McDonald's $MCD has been preparing U.S. menu items priced at $3 or less, along with $4 breakfast deals.
Current-dollar personal consumption expenditures increased $103.2 billion, or 0.5%, in February. Spending on goods rose $58.7 billion and spending on services increased $44.5 billion, the BEA said. According to Bloomberg, a surge in motor vehicle buying propelled the goods category higher, while an uptick in transportation services was the primary driver behind increased services expenditures.
On a current-dollar basis, personal income slipped $18.2 billion, or 0.1%, in February, with drops in dividend payments and government transfer receipts accounting for most of the shortfall. Bloomberg reported that after adjusting for inflation, disposable income shrank by 0.5% — a pace of contraction not seen in close to twelve months. The personal saving rate stood at 4.0%.
The February BEA release was originally scheduled for March 27 but was rescheduled due to the October-November 2025 government shutdown.
Elizabeth Renter, a senior economist at NerdWallet, made the case to Bloomberg that financial stress — whether current or expected — prompts households to retrench. "When households are in the midst of or are anticipating financial hardship, they pull back on spending in an act of self-preservation," she said. "This can drive real changes to the larger economy, in the form of slower growth."
The next BEA personal income and outlays report, covering March 2026, is scheduled for April 30.