US economy entangled by inflation and tariff shocks
Rising tariffs have contributed to increased inflation and higher consumer costs, while also diminishing people's outlook for the future and significantly harming consumer confidence.
TroibNews 
Editor's note: Xue Tianhang is a researcher at the Research Center for Regional Coordinated Development, Zhejiang University. The article reflects the author's opinions and not necessarily the views of CN. It has been translated from Chinese and edited for brevity and clarity.
The Personal Consumption Expenditures (PCE) Price Index is a key inflation metric that the US Federal Reserve closely monitors. It measures the changes in prices consumers pay over time for the same goods and services. The US Bureau of Economic Analysis recently released new data indicating that in January, the PCE Price Index rose by 2.5 percent compared to the previous year, while the core PCE Price Index saw a rise of 2.6 percent.
Despite a slight easing of inflation in January compared to the high figures from December 2024, both core and overall PCE metrics remain well above the Fed's 2 percent target. This indicates that the US economy is still experiencing considerable inflationary pressures. Furthermore, the University of Michigan's latest consumer survey for February reveals that US consumers expect an inflation rate of 3.5 percent over the next 5 to 10 years, which represents the largest month-on-month increase since May 2021 and the highest expectations since 1995.
In the context of high inflation, signs of contraction in the US consumer market are emerging. In January, consumer spending dropped by 0.2 percent month-on-month, marking the largest decline since February 2021 and falling short of market expectations. Real consumer spending fell by 0.5 percent, also exceeding market forecasts. When accounting for inflation, the decline in consumer purchasing power became even more apparent, underscoring a slowdown in consumer activity. The latest PCE report highlights that the unexpected downturn in spending was mainly attributed to reduced purchases of cars and durable goods. Given that consumer spending comprises 80 to 90 percent of US GDP, such disappointing consumption figures have intensified market concerns regarding the resilience of the US economy.
The ongoing high inflation and reduced consumption in the US stem from several interconnected factors, including rising tariffs. In recent years, the US has implemented increasing tariffs on imported goods to safeguard domestic industries and promote reshoring. However, the adverse consequences of these policies are becoming increasingly clear. Elevated tariffs have not only heightened inflation and consumer costs but have also undermined future expectations and significantly diminished consumer confidence. Data from the Conference Board, a business research group, revealed on February 25 that the US consumer confidence index dropped by 7 points to 98.3 in February, compared to a revised 105.3 in January, marking the most substantial month-on-month decline since August 2021. Furthermore, consumers are noting higher inflation expectations, with an increasing number identifying "trade" and "tariffs" as significant factors impacting their economic outlook.
There is a growing pessimism among consumers regarding both current and future labor market conditions. The rising tariffs disproportionately affect lower-income and younger Americans, compelling them to incur higher expenses for everyday necessities. Economists in the US have consistently warned the government about these implications. Economist Joseph Politano, for example, stated that tariff increases could elevate the costs of gas and groceries, hinder vital sectors such as auto manufacturing, and provoke retaliation against American exporters.
The significant economic growth and development the US has experienced since World War II clearly illustrate the value of international cooperation. Trade protectionism, which can be detrimental, will not only fail to address the US's underlying issues but could also disrupt global industrial and supply chains, ultimately negatively impacting the interests of countries around the world, including the United States. The Biden administration should consider limiting excessive tariff measures and seek to engage in constructive dialogue with other nations to resolve trade disputes fairly, promoting mutual benefits and shared prosperity.
James del Carmen contributed to this report for TROIB News
The Personal Consumption Expenditures (PCE) Price Index is a key inflation metric that the US Federal Reserve closely monitors. It measures the changes in prices consumers pay over time for the same goods and services. The US Bureau of Economic Analysis recently released new data indicating that in January, the PCE Price Index rose by 2.5 percent compared to the previous year, while the core PCE Price Index saw a rise of 2.6 percent.
Despite a slight easing of inflation in January compared to the high figures from December 2024, both core and overall PCE metrics remain well above the Fed's 2 percent target. This indicates that the US economy is still experiencing considerable inflationary pressures. Furthermore, the University of Michigan's latest consumer survey for February reveals that US consumers expect an inflation rate of 3.5 percent over the next 5 to 10 years, which represents the largest month-on-month increase since May 2021 and the highest expectations since 1995.
In the context of high inflation, signs of contraction in the US consumer market are emerging. In January, consumer spending dropped by 0.2 percent month-on-month, marking the largest decline since February 2021 and falling short of market expectations. Real consumer spending fell by 0.5 percent, also exceeding market forecasts. When accounting for inflation, the decline in consumer purchasing power became even more apparent, underscoring a slowdown in consumer activity. The latest PCE report highlights that the unexpected downturn in spending was mainly attributed to reduced purchases of cars and durable goods. Given that consumer spending comprises 80 to 90 percent of US GDP, such disappointing consumption figures have intensified market concerns regarding the resilience of the US economy.
The ongoing high inflation and reduced consumption in the US stem from several interconnected factors, including rising tariffs. In recent years, the US has implemented increasing tariffs on imported goods to safeguard domestic industries and promote reshoring. However, the adverse consequences of these policies are becoming increasingly clear. Elevated tariffs have not only heightened inflation and consumer costs but have also undermined future expectations and significantly diminished consumer confidence. Data from the Conference Board, a business research group, revealed on February 25 that the US consumer confidence index dropped by 7 points to 98.3 in February, compared to a revised 105.3 in January, marking the most substantial month-on-month decline since August 2021. Furthermore, consumers are noting higher inflation expectations, with an increasing number identifying "trade" and "tariffs" as significant factors impacting their economic outlook.
There is a growing pessimism among consumers regarding both current and future labor market conditions. The rising tariffs disproportionately affect lower-income and younger Americans, compelling them to incur higher expenses for everyday necessities. Economists in the US have consistently warned the government about these implications. Economist Joseph Politano, for example, stated that tariff increases could elevate the costs of gas and groceries, hinder vital sectors such as auto manufacturing, and provoke retaliation against American exporters.
The significant economic growth and development the US has experienced since World War II clearly illustrate the value of international cooperation. Trade protectionism, which can be detrimental, will not only fail to address the US's underlying issues but could also disrupt global industrial and supply chains, ultimately negatively impacting the interests of countries around the world, including the United States. The Biden administration should consider limiting excessive tariff measures and seek to engage in constructive dialogue with other nations to resolve trade disputes fairly, promoting mutual benefits and shared prosperity.
James del Carmen contributed to this report for TROIB News
