Wall Street nosedived on Friday after fresh economic data revealed an unexpected uptick in price pressures – sparking jitters that President Trump’s tariffs will keep inflation sticky.
A Commerce Department report showed the Personal Consumption Expenditures Price index – the Federal Reserve’s preferred inflation gauge – rose in line with what economists polled by Reuters were expecting.
However, excluding volatile items such as food and energy, the index rose more than expected on an annual basis in the previous month – while consumer spending rebounded after falling in January.
Spooked investors sold on the news, with the Dow Jones Industrial Average falling nearly 700 points, or 1.6%.
The S&P 500 dropped 1.8% and the Nasdaq 100 slipped 2.4%.
The markets have been on a volatile ride over the past month, fueled by apprehensions that President Trump’s policies could usher the economy into an era of elevated inflation and sluggish growth, potentially casting a shadow over the Federal Reserve’s monetary policy path.
“The Fed is in a tricky spot. On the one hand, the economy is downshifting which argues for lower rates. On the other hand, inflation looks set to pick up,” Bill Adams, chief economist at Comerica Bank, said in a note.
“Pulled in two directions, the Fed is likely to cut interest rates by a quarter of a percent around midyear.”
Central bankers earlier this month forecast two interest rate cuts in the second half of 2025.
Trump on Wednesday announced up to a 25% levy on foreign car imports, which are expected to start next week when he reveals his reciprocal tariff plan.
During a call earlier this month, Trump reportedly warned the CEOs of major automakers not to raise their prices to absorb the tariffs, according to The Wall Street Journal.
He told executives the White House would look unfavorably upon those who did so, leaving some automakers worried they could face stiff retribution for raising prices, sources with knowledge of the call told the Journal.
Friday’s data confirmed fears that inflation may be on the rise again.
Core PCE rose 2.8% in February over the past 12 months, higher than expected. On a monthly basis, it rose 0.4%. Economists surveyed by Dow Jones had expected a 2.7% and 0.3% increase, respectively.
The all-items core index ticked up 0.3% from the month before, according to the data.
Spending was lifted by a 1.4% surge in outlays on long-lasting manufactured goods like motor vehicles and parts, recreational goods and vehicles as well as furniture and other durable household equipment. Spending on nondurable goods such as food and beverages also rose.
Meanwhile, consumer spending rebounded in February due to the higher prices, rising 0.4% from the month before, according to data released by the Commerce Department’s Bureau of Economic Analysis on Friday.
That came in lower than the 0.5% gain forecast by analysts, but represented a significant jump from January’s 0.3% decline.
Personal income also rose 0.8% from the previous month, higher than estimates of a 0.4% increase.
But consumers are pulling back on discretionary spending. Outlays on services edged up 0.2%, with receipts at restaurants, hotels and motels dropping 15.0%.
“Consumers are clearly becoming more tactical and cautious in their spending as they try to navigate this uncertain economic and inflationary environment,” said Scott Anderson, chief U.S. economist at BMO Capital Markets.
Wall Street enjoyed a brief reprieve earlier this week when Trump appeared to hint that he would take a more targeted approach to his April 2 tariffs, perhaps excluding sector-specific taxes on his so-called “Liberation Day.”
“I may give a lot of countries breaks,” Trump told reporters Monday in the Oval Office.
But he later confirmed that tariffs on automobiles, aluminum and pharmaceuticals are still incoming.
The president’s planned 25% tariffs on Canada and Mexico, which are currently on a month-long pause, could send new car prices surging as much as $12,000, according to a study from Anderson Economic Group, an automotive research and consulting firm.
The potential price pressure has sent some automakers rushing to expand production capabilities in the US, while others warn they may be forced to slap higher price tags on vehicles.
Several other industries and nations are facing the risk of higher costs as the Trump administration proposes reciprocal tariffs, as well.
Specifically, the White House is looking to impose levies on the “dirty 15” – about 15% of nations designated as particular trade abusers, according to Treasury Secretary Scott Bessent.
The exact countries included in that list are unclear, though it will likely include nations like Australia, Brazil, Canada, China, the European Union, India, Japan, South Korea, Mexico, Russia, Vietnam and more, a source familiar with the plans told the Journal.
The president has argued the reciprocal taxes will help slim down the US’ trade deficit, while the 25% levies on Canada and Mexico – and a 20% tax on China – will help bring manufacturing back to the US and pressure these nations to tamp down on illegal border crossings and fentanyl trafficking.
