Data_Note: Core inflation up, spending meh, but jobs/incomes still solid.

There's a whiff of stagflation in the February inflation and spending data.

New, important hard data out this morning present the slightest whiff of stagflation. I’m not even sure these data—income and price data for February—are flashing yellow yet, especially give the still solid labor market (see UI claim note below) and a nice, two-month pop in disposable income. But my spidey senses are tingling, based on both price and spending numbers from the report, which look consistent with the anxiety that’s shown up clearly in sharply deteriorating consumer confidence data.

Inflation, as measured by the Federal Reserves preferred gauge, rose 0.3% in February and 2.5% over the past year. That’s what was expected and beyond the fact that disinflation is a bit more stalled than we’d like, not much to see here.

The core PCE deflator, which leaves out energy and food prices and is watched carefully by the Fed as it is a better gauge of underlying price pressures, rose 0.4% (0.37%) monthly and 2.8% yearly, both of which are slightly hotter than expected.

Getting under the hood, two sources contributing the disinflationary stall are durable goods (up 0.4% in Feb; its biggest monthly pop since Sept ‘22) and core services ex housing, a measure of underlying price pressures from the service sector (also up 0.4% in Feb). Below, I’ve plotted yearly inflation of both measures. As you see, core services is drifting down at a molasses pace, and durables, while still a negative on a yearly basis, are climbing. There’s a good chance that this is tariff related.

Then, there’s consumer spending, aka 68% of U.S. GDP.

For good reason, these inflation numbers typically constitute the big news from this report, but this month, I’m more interested than usual in another important number from the report: consumer spending. In the January report, real spending took a surprising hit, down 0.5%. In fact, that’s been one of the very few so-called hard economic indicators suggesting stress in the overall economy.

As I’ve documented, the soft indicators—surveys, confidence, investment plans—have been tanking due to the tariff whiplash and the ensuing concerns about their impact on both consumer and production costs. But the hard indicators, of which consumer spending is central, have generally held up so far, with the notable exception of January spending.

This morning we learned that not only was January real spending revised down, from -0.5% to -0.6%, but the bounce-back we were hoping for was meh at best, up 0.1%. Below, I’ve plotted real spending, which is north of $16 trillion, so we’re talking real money. You see the drop in Jan and the non-bounce-back in Fed. It’s just two months of noisy data, but it’s also the first two months of Q1, which forecasters already expect to come in well below ‘24Q4’s 2.4%; Goldman Sachs forecasters have penciled in 1% for real GDP growth, ‘25Q1. This result could cause more trouble for the quarter.

There are at least two strong, related caveats to all this nervousness re slower growth, higher inflation, aka stagflation. First, the job market remains solid; yesterday’s Unemployment Insurance claims look good, with both initial and continuing claims showing layoffs remain low, and that’s a trend result, not a weekly one.

Second, and intimately related to the still-intact labor market, real after-tax income looks good through February, up 0.3% in Jan and a hefty 0.5% in Feb. Mechanically, higher income and less spending means higher savings, and savings rates are up from a very low 3.3% in Dec to 4.6% in Feb.

Perhaps households are building a savings buffer in response to the angst that the whiplash tariff agenda is meting out to consumers, investors, and businesses. But whatever’s behind it, as long as the strong job market continues to broadly support household incomes, the expansion should proceed apace.

But this hard-data report shows some important negative forces potentially aligned against that benign result.