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The latest reading of the Federal Reserve's preferred inflation gauge showed prices increased more than expected in February as inflation remained above the Fed's 2% target. The release comes as investors have been closely watching data releases for signs of how President Trump's tariff policy is impacting the economy.

The "core" Personal Consumption Expenditures (PCE) index, which strips out food and energy costs and is closely watched by the central bank, rose 0.4% from the prior month during February, above economists' expectations for a 0.3% increase. The reading was higher than the 0.3% increase seen in January.

Over the prior year, core prices rose 2.8%, above Wall Street's expectations of 2.7% and higher than the 2.6% seen in January. On a yearly basis, overall PCE increased by 2.5%, in line with economists' expectations.

"We expect tariffs to slow real spending growth and push up prices in the coming months," Oxford Economics deputy chief US economist Michael Pearce wrote in a note to clients on Friday. "We think that combination will keep the Fed on extended pause, especially with inflation expectations showing increasing signs of becoming unanchored."

Friday's release also showed personal spending increased 0.4% in February, below economists' expectations of a 0.5% increase. February's spending increase followed a surprise decline in January, the first in two years, which further fueled fears about the trajectory of US economic growth.

"Consumers are resistant to price increases," Renaissance Macro head of economics Neil Dutta wrote in a note on Friday. "That's what February's personal income & spending report demonstrates. Core inflation firmed and real consumption remains soft."

The release comes just one week after the Fed held interest rates steady at its March meeting and lowered its forecast for economic growth in 2025 while raising its inflation projection. The median forecast from officials calls for two interest rate cuts at some point this year.