Inflation’s Up and Sentiment’s Down as Consumers Pad Their Savings

The push and pull of various pressures — inflation, tariffs and worries about the general state of affairs — has shown up in several economic reports released Friday (March 28).

A connecting of the dots indicates that consumer spending was anemic, in real terms, as inflation continues to run hot. Sentiment’s at an ebb not seen in years, and households boosted their savings where they could, likely as a buffer against the uncertainties of what comes next.

Data indicated that inflation accelerated at a pace not seen in more than a year. Consumer spending gained some ground on a month-over-month basis, but it must be noted that that increase comes off a lower base in January, which declined from December — and the latest results missed expectations.

In terms of headline numbers, consumer spending was up 0.4% in February on the back of a downwardly revised 0.3% dip in January, per a Bureau of Economic Analysis (BEA) report. Consensus expectations had been for a 0.5% gain last month. 

Regarding inflation, the personal consumption expenditure (PCE) price index increased by 0.3% from the previous month. 

But real PCE, which is adjusted for inflation, barely recovered from January’s 0.6% decline, rising just 0.1% in February. The increase in spending was primarily driven by goods, which rose by 0.7% after falling 2.1% in the prior month. Categories such as motor vehicle parts (1.6%), furnishings and household equipment (0.7%), and food and beverages (0.7%) contributed to this growth.

Meanwhile, disposable personal income (DPI), which accounts for personal income after taxes, increased by $191.6 billion, or 0.9%. Consumers seem to be saving what they can: Despite rising consumer spending, the personal saving rate, measured as a share of disposable personal income increased to 4.6% in February, reaching $1.02 trillion. We’re well above the 3.3% saving rate that had been notched in December. 

As for what lies ahead: The University of Michigan released the final readings for their consumer sentiment index, which shows low spirit among consumers, as sentiment slid another 12% this month, on the back of 10% and 3% decreases in the two months prior.

The accumulated drop in the first three months of 2025 amounts to 23%. As reported by PYMNTS, this drop constitutes the steepest cumulative decline in sentiment for the first quarter following a presidential election in the 21st century. Once again, declines were consistent across all demographic and political affiliations.

Within the index, it is the subindex of expectations for the future that most deteriorated (18%) with uncertainty around policy continuing to be a decisive element. Two-thirds of consumers expect unemployment to rise in the year ahead, the highest reading since 2009. Assessment on current economic conditions decreased somewhat (3%) and stand 15% below December’s readings.

Year-ahead inflation expectations jumped up from 4.3% last month to 5% this month, the highest reading since November 2022 and marking three consecutive months of “unusually large” increases (0.5 percentage points or more, as defined by the same report).

The recent turmoil is also taking a toll on long-run inflation expectations, which surged from 3.5% in February to 4.1% in March. This is the largest month-over-month increase seen since 1993, and indicates that that the high inflation span has extended to a long enough period to generate long-term changes in consumer expectations, and likely, behaviors.

The data points reported above should be sobering for merchants, as they’re faced with their own increased input costs due to tariffs, and passing along price increases will be a dicey proposition at best.

This week’s (final) GDP data for the fourth quarter may represent a harbinger of continued slowing economic growth.

The BEA said that real GDP showed a revised 2.4% annual increase for the last quarter of the year, which means economic activity throughout the whole of 2024 grew 2.8% compared to 2023 (unchanged from the second estimate). Q4 increases came on the back of overall jumps of 3% and 3.1% in Q2 and Q3, respectively, which shows just how things are slowing.

2024 was sustained by resilient consumer spending, which scored a 4% increase in Q4 and averaged a 2.8% growth rate over the full year. The engine of economic growth — namely, household spending — seems to be sputtering.

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