Inflation and tariff shocks entangle US economy

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 CGTN. It has been translated from Chinese and edited for brevity and clarity.

The Personal Consumption Expenditures (PCE) Price Index is an inflation indicator closely monitored by the US Federal Reserve. It reflects changes in the prices consumers pay for the same goods and services over time. The US Bureau of Economic Analysis released the latest data on Friday, showing that in January, the US PCE Price Index rose 2.5 percent as compared to the same period a year ago, while the core PCE Price Index (excluding food and energy) increased by 2.6 percent from one year ago.

Although inflation somewhat eased in January compared to the grim figures of December 2024, both the core and overall PCE remain significantly above the Fed's 2 percent target. This signals that the US economy is still under substantial inflationary pressure. In addition, according to the University of Michigan's latest survey of consumers in February, US consumers expect a 3.5 percent inflation rate over the next 5 to 10 years, marking the largest month-on-month increase since May 2021 and the highest level since 1995.

Amid high inflation, there are observable signs of a contraction in the US consumer market. In January, US consumer spending fell by 0.2 percent month-on-month, the largest decline since February 2021 and significantly lower than market expectations. Real consumer spending dropped by 0.5 percent, also far exceeding market expectations. When adjusted for inflation, the decrease in consumer purchasing power was even more pronounced, leading to a clearer slowdown in consumer spending. The latest PCE data report reveals that the unexpected decline in US consumer spending was largely driven by decreases in the purchases of cars and durable goods. Since consumer spending accounts for 80 to 90 percent of the US GDP, the troublesome consumption figures have further heightened market concerns about the resilience of the US economy.

The persistently high inflation and shrinking consumption in the US are attributable to multiple factors, including tariff hikes. In recent years, the US has imposed increasingly higher tariffs on imported goods in an effort to protect domestic industries and promote the reshoring of enterprises. However, the side effects of these policies have gradually become evident. Rising tariffs have not only pushed up inflation and increased consumer costs, but also weakened people's expectations for the future and severely damaged consumer confidence. According to data released by the business research group Conference Board on February 25, the US consumer confidence index sank by 7 points to 98.3 in February from the revised 105.3 in January, marking the largest month-on-month decline since August 2021. The data further reveal that consumers expect higher inflation in the future, with more and more consumers listing "trade" and "tariffs" as factors influencing their outlook on the economy. 

Consumers have become more pessimistic about both the current and future labor markets. The rising tariffs have a particularly severe impact on the welfare of lower-income and younger Americans, forcing them to pay more for daily necessities. US economists have repeatedly sent warnings to the government. Economist Joseph Politano, for instance, warned that tariff increases would drive up the price of gas and groceries, paralyze key industries like auto manufacturing, and inspire retaliation against American exporters.

The global economic boom and rapid development of the US economy since World War II have clearly demonstrated the importance of international cooperation. Beggar-thy-neighbor trade protectionism will not only fail to resolve the US's inherent issues but will also disrupt global industrial and supply chains, ultimately harming the interests of countries worldwide, including the US. The Trump administration should refrain from overusing tariff measures and instead engage in dialogue with other countries to address trade disputes more equitably, fostering mutual benefits and common prosperity.