Inflation stayed stubbornly high heading into the Iran war, Fed’s preferred gauge shows

Key Points:

• Consumer spending in the U.S. rose 0.5% in February, slightly higher than January's 0.3%, but when adjusted for inflation, the increase was only 0.1%, indicating spending just kept pace with rising prices.
• Inflation remained elevated, with the Personal Consumption Expenditures (PCE) price index increasing 0.4% in February, maintaining an annual rate of 2.8%, while the core PCE index (excluding food and energy) also rose 0.4%, pushing its annual rate to 3%.
• The savings rate dropped to 4% as consumers dipped into savings to maintain spending amid a 0.5% decline in real after-tax incomes, despite expectations of tax refunds in coming months that may be offset by higher gas prices and other costs.
• Revised data showed U.S. economic growth slowed more than previously estimated, with GDP growing at an annualized rate of 0.5% in Q4 2023, down from earlier estimates of 0.7% and 1.4%, reflecting weaker business investment during a government shutdown.
• The ongoing Iran conflict is expected to drive inflation higher through energy and supply shocks, reducing the likelihood of near-term Federal Reserve interest rate cuts as inflation may soon approach 4%.