Updated at 9:07 AM EDT
The Federal Reserve’s preferred inflation gauge ticked higher last month, data indicated Friday, suggesting that tariff price increases are starting to work their way into the world’s biggest economy.
The Bureau of Economic Analysis’s PCE Price Index report for the moth of February, which is closely-tracked by the Fed for a clearer indication of inflation pressures, showed core prices rising at an annual rate of 2.8%, faster than the January reading and Wall Street’s consensus forecast of 2.7%.
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Core price pressures, which strip away volatile food and energy components, were up 0.4% on the month, faster than January’s 0.3% increase and Wall Street’s consensus estimate of 0.3%.
Related: Top analyst overhauls GM, Ford stock prices targets amid tariff risk
The BEA’s headline PCE inflation index held at an annual rate of 2.5%, matching Wall Street’s estimate: the 2.5% pace recorded in January. The BEA said prices rose 0.3% on the month, matching tallies for the previous two months.
The BEA also noted that personal incomes for February rose 0.8%, while spending recovered modestly, rising 0.1% following last month’s 0.6% decline.
Fed Chairman Jerome Powell suggested last week that tariff impacts could be ‘transitory,’ but said more data would be needed to judge their longer-term effect.
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“Today’s PCE number puts the Fed in a tough spot,” said Key Private Bank’s senior portfolio manager Paul Toft. “It’s clear the inflation battle is not over and their 2% goal remains elusive, but pending tariffs are likely to dampen economic growth if they remain somewhat permanent.”
“With new tariffs expected to come online next week, along with the auto tariffs announced this week, the Fed will be even slower to cut rates at their next few meetings as the tariffs will most likely be somewhat inflationary,” he added.
U.S. stocks extended declines following the data release, with futures indicating a 22 point opening bell decline for the S&P 500 and a 170 point pullback for the Dow Jones Industrial Average. The tech-focused Nasdaq is called 140 points lower.
Benchmark 2-year note yields were 1 basis point lower at 3.986% following the data release, while 10-year notes slipped 2 basis points to 4.323%.
The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.19% higher at 104.431.
Powell cites tariff-related uncertainty
Last week Fed Chairman Jerome Powell said the central bank’s new growth and inflation forecasts, which lowered GDP estimates while warning of renewed price pressures, underscored the tariff-related uncertainty the economy faces in coming months.
He went on to say that those projections were built around a base case that inflation stoked by U.S. import tariffs would be “transitory.” That’s a word most observers had assumed was indefinitely retired in 2022 when post-pandemic inflation ran much hotter than Fed officials had anticipated.
“The last time there were tariffs … inflation was transitory,” Powell insisted when pressed by reporters. “And it’s still the truth. If there’s an inflationary impulse that’s going to go away on its own, it’s not the right policy to tighten.”
Related: Tariff risks handcuff Trump and Fed’s Powell
The Fed left its benchmark lending rate at 4.375%, with CME Group’s FedWatch tool pegging the first rate cut of the year in June, with a follow-on reduction expected in September.
However, with inflation pressures percolating, and the economy showing signs of a sharp slowdown from the 2.4% growth rate it recorded at the end of last year, investors are starting to factor stagflation risks into the world’s biggest economy — and elsehwere.
“Stagflation, a combination of low or no growth with persistent inflation, is not just a domestic risk,” said LPL Financial’s chief economist Jeffery Roach.
“At the last meeting of Bank of England officials, concerns across the pond are mounting about the same issues since trade wars benefit no one with impact across national boundary lines.”
Related: Veteran fund manager unveils eye-popping S&P 500 forecast
