Consumption nearly stalls, Middle East war fuels "inflation beast", US economy enters dangerous "stagflation" territory.

In the backdrop of tenacious inflation stickiness in the macroeconomy, consumer spending in the United States in February showed almost no growth trend, and is expected to further accelerate in the future due to the impact of the Iran war. Data released by the US Bureau of Economic Analysis on Thursday showed that consumer spending, adjusted for inflation, increased by 0.1% in February compared to January, following a stagnation in January. The so-called core personal consumption expenditure price index (or "core PCE", also the Fed's favorite inflation indicator) - which excludes volatile food and energy items - increased by 0.4% compared to January, consistent with market expectations and the January data. Year-on-year, the Fed's preferred inflation gauge (core PCE) rose by 3%, in line with market expectations, slightly lower than January's 3.1%. Other detailed data showed that US goods spending saw its first rise in three months, primarily driven by a strong rebound in motor vehicle purchases. Service spending in February increased slightly, mainly driven by transportation and travel services. Overall, the PCE index increased by 2.8% year-on-year in February, still significantly higher than the Fed's 2% target anchor. Overall, the Fed's preferred inflation indicator remains high, and the signs of weak consumer spending alongside the expected increase in future inflation suggest that stagflation risks are rising. In a separate development, the United States and Iran agreed to a temporary two-week ceasefire on Wednesday, in exchange for Iran allowing safe passage of large vessels through the Strait of Hormuz. Oil prices fell in response, but Brent crude futures prices remained significantly higher by $25 per barrel compared to pre-war levels. However, the latest geopolitical developments indicate that the consensus on the temporary ceasefire between the US and Iran has been shattered, as Israel violated the ceasefire agreement. Just as the ceasefire agreement came into effect, the Israeli Defense Forces launched large-scale airstrikes on several areas in Lebanon, resulting in over 250 casualties. This military action is seen as a strong pressure tactic on the US-Iran talks. In response, Iran's chief negotiator warned that Israel is escalating its parallel war, while the US insists on Iran abandoning its nuclear ambitions, which could jeopardize the negotiations aimed at reaching a permanent peace agreement. Economists widely expect that the March CPI will likely show a significant increase, based on a new survey targeting economists, indicating an expected increase of 0.9% month-on-month for the US CPI and around 0.3% for core CPI in March. If realized, this would be a very noticeable single-month jump, largely driven by the war transmission effect on oil prices and gasoline prices. Meanwhile, the New York Fed's consumer survey for March shows that inflation expectations for the next year have risen to 3.4%, up from 3.0% in February, with expectations for gasoline prices rising sharply to 9.4%, indicating that energy shocks have rapidly transmitted to consumer expectations. With the labor market and US economic growth significantly slowing down, supply shocks are pushing inflation higher. This increasingly apparent "stagflation" sign will undoubtedly further push the Fed into a dilemma. "When families are facing or expecting economic difficulties, they will reduce spending out of self-protection," said Elizabeth Rent, Senior Economist at NerdWallet, a personal finance platform. "This could have a real impact on the overall economy, leading to a slowdown in economic growth." The long-standing shadow of inflation It is worth noting that with the new round of Middle East geopolitical tensions resulting from the US air strike on Iran raising fuel and raw material costs, inflation pressures are expected to intensify further. On Thursday, due to investor concerns about the fragility of the ceasefire agreement and the escalating geopolitical risks in the Middle East, as well as doubts about the relaxation of restrictions in the Strait of Hormuz, Brent crude futures prices rose significantly. The latest consumer spending data shows that over the past six months, as living costs have risen and the job market has been sluggish, American consumers have collectively become more cautious in their spending habits. According to statistics from the Bureau of Economic Analysis (BEA), real disposable personal income unexpectedly fell by 0.5% month-on-month in February, the largest drop in nearly a year. Real personal consumption expenditure in February only increased by 0.1% month-on-month, highlighting the lack of growth in consumer spending in the US in February against a backdrop of inflation stickiness in the macroeconomy. Some large companies have already started passing on these costs, or at least announced plans to do so in the near future. Higher tax refunds helped support consumer spending in February, but rising energy prices may weaken this relative positive factor in the coming months. Delta Air Lines has announced plans to further raise ticket prices, in addition to the already implemented fare and baggage check increases. Meanwhile, the United States Postal Service plans to increase parcel prices by 8% by mid-January next year. Additional data released by the US Bureau of Economic Analysis showed that the US economy's rate of expansion in the final few months of 2025 fell below the general expectations of economists. Real gross domestic product (GDP) - the value of goods and services produced by the US - increased by an annualized rate of 0.5% quarter-on-quarter in the fourth quarter, lower than the unanimous expectation of economists of 0.7%. Wartime fuels US inflation: March CPI may see the strongest single-month jump in recent years US domestic inflation indicators prior to the war did not truly fall into the safe zone, and March is likely to witness a very noticeable "acceleration of inflation" due to the energy shock. The data for February already showed this fragile underlying trend - consumer spending, adjusted for inflation, increased by only 0.1%, the core PCE increased by 0.4% month-on-month and 3.0% year-on-year, indicating that household demand is slowing down, but core price pressures are still sticky. After entering March, with the new round of conflict in the Middle East pushing up oil and gasoline prices, the latest survey targeting economists shows that macroeconomists generally expect the CPI to increase by 0.9% in March. If this is realized, it will be one of the strongest single-month increases since the peak inflation phase in 2022. In other words, the Iran war has rekindled the "inflation beast" that never fully retreated. More importantly, the energy shock caused by the Middle East geopolitical conflict is spreading to inflation expectations, consumer behavior, and monetary policy paths. The New York Fed's March survey shows that US consumers' inflation expectations for the next year have risen to 3.4%, significantly higher than the 3.0% in February, with expectations for gasoline prices skyrocketing to 9.4%. At the same time, the minutes of the Fed's March meeting indicate that some officials are more open to another rate hike, while market expectations for a rate cut within the year have significantly cooled. From the perspective of Wall Street macro strategists, the most dangerous situation at present is not just "high inflation", but a combination of "weakening growth + energy-driven re-inflation + a more difficult dovish Fed". Consumer spending and growth momentum are weakening, but energy shocks are pushing short-term inflation and inflation expectations higher, which is a typical stagflation-type combination - a situation that the Fed least wants to see.