Lauren B. from Buffalo, NY asks: Hi Mitch, I’m writing about the inflation report that came out last week that led to a big drop in the stock market. It doesn’t seem to be getting much attention but felt like an important story. Do you think inflation is still a problem, and that tariffs will make it worse? What would that mean for markets?
Mitch’s Response:
You’re referring to the release of the February personal consumption expenditures (PCE) price index, which is the Federal Reserve’s preferred inflation gauge. First, allow me to give readers a snapshot of that inflation report, and then I’ll turn to your question.
According to the U.S. Bureau of Economic Analysis, in February 2025 the PCE price index showed that core inflation, which excludes food and energy prices, increased by 0.4% from the previous month—the largest monthly rise since January 2024. The year-over-year change for core PCE was 2.8%. The broader headline PCE price index—which is of particular focus for the Federal Reserve—climbed 0.3% for the month and was up 2.5% from a year earlier. Services inflation was a key driver, continuing to outpace goods inflation. Prices for services rose 0.4%, while prices for goods rose by just 0.1%.1
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PCE Price Index (year-over-year % change)
The short answer to your question is that the inflation war is not yet over, and signs are emerging that we could see a slight re-acceleration from here. The University of Michigan’s survey of expectations for future inflation rose to 4.1%, which is of course double the Fed’s target and suggests that inflation is becoming slightly un-anchored. Consumer sentiment has also deteriorated, with the University of Michigan’s index dropping to 57 in March—a 12% decrease from February—reaching its lowest level since 2022. This decline reflects growing concerns about personal finances, business conditions, unemployment, and inflation.
As you mention in your question, financial markets responded negatively to this inflation print and other weaker-than-expected economic data announced last week, particularly in consumer spending. Investor apprehension is also growing as tariff policy reaches a critical phase this week, with “Liberation Day” policy actions expected to be announced on April 2.
In response to your question about whether tariffs could make inflation worse, I think the simple answer is yes—broad-based tariffs will almost certainly create price pressures. That being said, the downstream impact of higher inflation may not automatically be negative. The Federal Reserve will likely be able to identify tariff-induced price pressures in the component details of inflation readings. This means higher inflation may not automatically trigger rate hikes, and we could see a scenario where the Fed still cuts rates even as inflation ticks higher—assuming that growth is slowing, and the unemployment rate is rising.
For markets, it is all about expectations vs. reality. Will tariffs be lower or higher than expected, and will we get certainty on tariff policy this week or will it continue to be an on-again off-again dance? I think it’s important to wait for the fine print and make assessments then.
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Disclosure
2 ZIM may amend or rescind the “7 Secrets to Building the Ultimate DIY Retirement Portfolio” guide for any reason and at ZIM’s discretion.
3 Fred Economic Data. March 28, 2025. https://fred.stlouisfed.org/series/PCEPI#
4 ZIM may amend or rescind the “7 Secrets to Building the Ultimate DIY Retirement Portfolio” guide for any reason and at ZIM’s discretion.
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