We had higher prices and a slower economy even before the bombs started falling

After a sizable increase to start off 2026, there was a step back in February on income growth. But Americans did keep spending in the month before bombs started to fall on Iran.

Personal income decreased $18.2 billion (0.1 percent at a monthly rate) in February, according to estimates released today by the U.S. Bureau of Economic Analysis. Disposable personal income (DPI)— personal income less personal current taxes—decreased $18.3 billion (0.1 percent), and personal consumption expenditures (PCE) increased $103.2 billion (0.5 percent)….

Personal outlays—the sum of PCE, personal interest payments, and personal current transfer payments—increased $106.5 billion in February. Personal saving was $931.5 billion in February, and the personal saving rate—personal saving as a percentage of DPI—was 4.0 percent.

If you balance it out with a relatively strong first month of this year, personal income has risen compared to the end of 2025, and while growth in work-related income is lower than what we had in 2024, we are still seeing the number be safely above zero.

The main reasons that overall incomes fell in February was due to a drop in a big source of investment income, and Trump/GOP’s cuts in assistance to pay for health care.

Personal dividend income decreased $39.7 billion, reflecting dividend information from company financial statements.
• Personal current transfer receipts decreased $21.6 billion, led by a decrease of $34.4 billion in other government social benefits reflecting estimated Affordable Care Act enrollments.

That lack of ACA assistance was already a strain on a lot of Americans’ finances, but the lack of help is now compounded by something we saw in another part of the income and spending report. That showed prices were rising at a significant rate even before oil and gas prices spiked in March.

…[W]hen taking elevated inflation into account, spending rose just 0.1% from January, when it was flat.

Thursday’s report also showed that inflation remained stubbornly higher than typical: The Personal Consumption Expenditures price index – the inflation gauge the Federal Reserve uses for its 2% target rate – climbed 0.4% from January, which held the annual rate at 2.8%.

Excluding food and energy prices, which tend to be quite volatile, the core PCE price index also rose 0.4%, bringing the annual rate to 3% from 2.9% the month before.

“Core prices are actually gaining momentum, up 4.4% annualized the past three months, compared with 3.4% in the past six months … and this is before spillover pressures from the Iran war,” Sal Guatieri, senior economist at BMO Capital Markets, wrote in a note to investors. “Goods prices popped 0.7%, the most in about four years, indicating some lingering tariff effects.”

UGH! There goes any increased tax refund you may have had this year.

And there goes the one-month bump in the personal savings rate that happened in January. It’s back down to the 4.0% level, and significantly lower than what Americans were saving when Trump declared his “Liberation Day” tariffs in April.

Also notice how the 2022 savings rate declined as gas prices and general inflation exploded in the first half of that year. Seems like a good guide for where we are going in the next few of these reports.

On Friday, we will get our first indication of how much overall prices grew last month when we have the March release of the Consumer Price Index. And last week’s strong jobs report also included a lame hourly wage increase of 0.2%, which likely means real wages are going to decline by quite a bit, as prices are likely to rise by much more than that.

But even that March report is only going to show the first few weeks of the price spikes, and not the continued increase into April. It’s not a good sign when inflation-adjusted income and spending growth was tame through February, because we know it’s going to get worse in March, April, and likely beyond.