U.S. Stocks Plunge 2.8% as Inflation Surges 2.8% and Consumer Spending Slows to 0.1%

U.S. stocks experienced a significant decline on Friday, driven by disappointing updates on inflation and consumer spending. The market's downward trajectory was fueled by concerns over rising inflation and a slowdown in consumer spending, which together painted a grim picture of the economy's health.

Consumer spending, a critical component of the U.S. economy, rose by only 0.4% in February, a modest increase that was further diminished to 0.1% after adjusting for inflation. This follows a sharp 0.6% drop in January, indicating a growing reluctance among consumers to spend due to economic uncertainties and rising prices. The personal consumption expenditures price index, excluding volatile food and energy, accelerated to a 2.8% annual rate from 2.6% in January, surpassing the Federal Reserve's target inflation rate of 2%.

The economic data released on Friday raised alarms about the potential for stagflation, a period characterized by high inflation and slow economic growth. This concern was echoed by Mohamed El-Erian, who noted that long-term consumer expectations for inflation had surged to a 32-year high of 4.1%, according to a University of Michigan survey. The survey also revealed that consumer sentiment had plummeted to its lowest level since 2022, with a significant drop in the index of expectations, reflecting mounting anxiety about the economic outlook.

The dimming economic outlook has been further exacerbated by the Federal Reserve's downgraded forecast for economic growth. In a median estimate released on March 19, central bank officials revised their forecast for economic growth in 2025 to 1.7% from 2.1% in December, citing increased uncertainty around the economic outlook. The Atlanta Fed forecasted that gross domestic product would shrink during the first quarter at a 2.8% annual rate, highlighting the growing economic challenges.

Consumer sentiment has also taken a hit, with a 12% decline in consumer confidence this month, according to a University of Michigan survey. The survey found that consumer expectations for employment, personal income, and business conditions had plummeted to a 12-year low, with one out of three consumers expecting unemployment to rise in the coming year. This trend underscores the vulnerability of consumer spending, which has been a primary driver of economic growth in recent years.

The economic data has also raised concerns about the impact of tariffs on inflation. Fed officials have warned that tariffs could fuel price pressures, with St. Louis Fed President Alberto Musalem cautioning that the impact of tariff increases on inflation may not be entirely temporary. Boston Fed President Susan Collins echoed this sentiment, stating that tariffs are likely to increase inflation in the near term and could have a more persistent impact if not managed properly.

The Federal Reserve has acknowledged the unusually murky economic outlook, with Richmond Fed President Tom Barkin describing the situation as a "dense fog" that has fallen over the economy. This uncertainty has led businesses to adopt a cautious approach, with many unwilling to take risks in the current environment. The Fed's cautious stance on monetary policy reflects the need for a measured response to the evolving economic landscape, as officials navigate the challenges posed by rising inflation and slowing consumer spending.