Americans' spending slowed more than expected in February as inflation surged even higher

• Americans' spending grew just 0.2% through February, the Bureau of Economic Analysis said.
• That missed the forecast for a 0.5% gain and marked a sharp slowdown from January's 2.7% leap.

Americans hit the brakes on the blockbuster spending boom in February as inflation boosted prices for everything from gas to groceries.

Personal consumption expenditures — the government's measure for overall consumer spending — rose just 0.2%, or about $35 billion, through the month of February, the Bureau of Economic Analysis said Thursday morning. That landed below the median forecast for a 0.5% gain from economists surveyed by Bloomberg. It also showed spending slowing dramatically from the 2.7% leap seen the previous month.

Consumer spending counts for roughly 70% of economic activity, making it a key fuel for the US's return to pre-pandemic health. The story so far has been largely positive. Stimulus and pent-up savings seen through the first year of the crisis helped spending surge once the country reopened in early 2021. Americans' shopping not only rebounded but settled into a permanently higher trend.

Yet the Thursday print suggests inflation and Americans' bleak economic sentiments are finally dragging on the recovery. Prices for everyday goods and services soared 6.4% in the year through February, according to the PCE price index, marking the strongest inflation since January 1982. Prices for food were up 8% year-over-year, while energy goods like gas and electricity cost nearly 26% more than they did just one year ago.

The historically strong inflation has been the main driver behind Americans feeling the worst about the economy in nearly a decade, with one-third of households bracing for their finances to worsen throughout the year, according to the University of Michigan.

Some pockets of the economy still enjoyed a healthy spending boost through February. Spending at restaurants and hotels rose by $33 billion, marking the largest increase of any category. Gas stations and other energy goods saw a $27 billion gain, though the increase was somewhat powered by higher prices. Health care and recreation services followed with gains of $16 billion and $14.9 billion, respectively.

Spending shrank the most for cars and vehicle parts, with Americans dropping $30.7 billion less on such goods, according to the report. Spending on recreational goods and vehicles dropped by $12.7 billion. Financial services and insurance spending was mostly flat through the month.

The report broadly showed a shift in spending toward services and away from goods, suggesting a possible slowdown in one of the biggest drivers of inflation. Price growth accelerated through 2021 as Americans continued to spend big on goods and supply-chain strains kept firms from matching supply with demand. While reopening saw a rebound in services spending, goods purchases held strong and exacerbated the market imbalance. With the February report showing a shift in purchasing behavior, the drop in goods spending could create room for inventory to recover and inflation to cool.

The outlook remains extremely murky, though. The decline in goods spending "won't necessarily continue," as prior months have shown the measure to be highly volatile, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said. Unless the supply of key goods like semiconductors can recover and spending continues to soften, it's still an uphill battle to get inflation to more sustainable levels.