PCE Deflator
The Personal Consumption Expenditures (PCE) deflator—the Federal Reserve’s preferred inflation gauge—rose 0.3% in February, marking the third consecutive month of similar gains. Food prices held steady, while energy costs inched up just 0.1%. Stripping out the more volatile food and energy categories, core PCE climbed 0.4% last month, its fastest monthly increase since January 2024.
On an annual basis, the PCE deflator rose 2.5% over the past year, matching January’s pace. However, core inflation edged higher to 2.8% year-over-year in February, up slightly from 2.7% in the prior month. Although inflation has eased considerably from its pandemic-era peaks—7.1% for headline PCE in June 2022 and 5.5% for core PCE in September 2022—core inflation remains stubbornly above the Fed’s 2% target. Over the past 10 months, core PCE has averaged a 2.7% annual increase, signaling stalled momentum in the broader disinflation trend.
The Federal Reserve is expected to maintain a cautious stance, closely monitoring inflation trends before making further policy adjustments. The Federal Open Market Committee (FOMC) left short-term interest rates unchanged at its latest meeting, signaling a wait-and-see approach as it assesses upcoming data. With inflation proving stickier than policymakers would like, interest rates are expected to remain elevated, even as the potential for cuts later this year remains on the table.
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Personal consumption expenditures rose 0.4% in February, bouncing back from a 0.3% decline in January. However, spending on food services and accommodations fell 1.0%—its second decline in the past three months—suggesting a pullback in discretionary outlays. Over the past year, total personal spending increased 5.3%, while food services and accommodations saw a more subdued 2.5% gain. Overall, the spending data presents a mixed picture: signs of resilience tempered by caution amid ongoing economic uncertainty.
Part of the increase in spending reflects higher prices. Inflation-adjusted personal consumption expenditures—measured in chained 2017 dollars—rose 2.7% year-over-year, but real spending edged up just 0.1% in February. In contrast, real spending on food services and accommodations declined 1.4% for the month and is down 0.9% from a year ago. This suggests that restaurant and travel activity has cooled somewhat, reinforcing the narrative of a more cautious consumer.
Despite these strong income gains, consumers appeared more cautious with their spending. The personal savings rate climbed from a cycle-low of 3.5% in December—the lowest since November 2022—to 4.3% in January and 4.6% in February, the highest since June. While this rebound suggests growing consumer restraint, it also reflects a reversion to more typical behavior: the average savings rate hovered around 4.7% in 2023 and stands at 4.5% so far in 2024.
