A customer buys lunch at Smolak Farms, in North Andover, Massachusetts. Image Credit: AP

Washington: US consumer spending barely rose in February amid delays in the payment of income tax refunds, but the biggest annual increase in inflation in nearly five years supported expectations of further interest rate hikes this year.

The Commerce Department said on Friday consumer spending, which accounts for more than two-thirds of US economic activity, edged up 0.1 per cent. That was the smallest gain since August and followed an unrevised 0.2 per cent rise in January.

Economists had expected a 0.2 per cent increase.

The government delayed the issuing of tax refunds this year as part of efforts to combat fraud. Spending last month was held back by a 0.1 per cent dip in purchases of big-ticket items like automobiles. While unseasonably warm weather reduced households’ heating bills, it restricted spending last month.

Weak consumer spending suggested that economic growth slowed further in the first quarter. Gross domestic product increased at a 2.1 per cent annualised rate in the fourth quarter, stepping down from the July-September quarter’s brisk 3.5 per cent pace.

Despite signs of moderate growth, the Federal Reserve is expected to raise interest rates at least twice more this year.

The US central bank raised its benchmark overnight interest rates by a quarter of a percentage point this month.

Wage growth

Prices for US Treasuries fell on the data, while the dollar was little changed against a basket of currencies. US stock index futures were slightly lower.

With consumer confidence at 16-year highs and labour market tightness pushing up wage growth, the moderation in spending is likely to be temporary. Even with economic growth slowing at the start of the year, inflation is rising.

The personal consumption expenditures (PCE) price index gained 0.1 per cent last month after jumping 0.4 per cent in January. That lifted the year-on-year rate of increase in the PCE price index to 2.1 per cent, the biggest gain since April 2012. The PCE price index rose 1.9 per cent in January.

Excluding food and energy, the so-called core PCE price index increased 0.2 per cent last month after rising 0.3 per cent in January. In the 12 months through February, the core PCE price index increased 1.8 per cent after a similar gain in January.

Price pressures

The core PCE is the Federal Reserve’s preferred inflation measure and is running below its 2 per cent target. Inflation is now in the upper end of the range that Fed officials in March felt would be reached this year.

Rising price pressures are also eating into consumer spending. When adjusted for inflation, consumer spending fell 0.1 per cent in February after declining 0.2 per cent in January.

That suggests a sharp deceleration in the pace of consumer spending after a robust 3.5 per cent growth rate in the fourth quarter.

Personal income rose 0.4 per cent last month after advancing 0.5 per cent in January. Wages increased 0.5 per cent, the biggest gain in five months.

Income at the disposal of households after accounting for inflation increased 0.2 per cent after dipping 0.1 per cent in January. Savings rose to a five-month high of $808.0 billion from $770.9 billion (Dh2.8 trillion) in January.