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Inflation reaches Fed target for first time in almost five years

Reuters

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

The Commerce Department said consumer spending edged up a tiny 0.1 percent in February following a 0.2 percent increase in January.

The figures are consistent with projections of softer consumer spending in the first quarter, partly due to smaller outlays for household utilities amid milder weather.

"Given the weather-related weakness in utilities spending as well as some delays in tax refunds for low- and middle-income earners in February, we expect consumer spending to strengthen in the quarters ahead", said Eugenio Aleman, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

An inflation index known as PCE rose 0.1% in February, bringing the increase over the past 12 months to 2.1%. It is the sharpest 12-month rise since March 2012 and slightly above the Fed's 2% inflation target. The PCE deflator ticked up just 0.1 percent on a drop back in energy prices over the month, but the year-over-year rate rose to 2.1 percent as energy prices have rebounded more than 30 percent over the past year.

Economists had expected a 0.2 percent increase. That was fastest annual rate in almost five years.

The slowdown in consumer spending reported by the US Commerce Department on Friday is, however, likely to be temporary with consumer confidence at a more than 16-year high and a tightening labour market pushing up wage growth. With strong payroll gains and an uptick in average hourly earnings last month, income from wages & salaries rose a touch ahead of the headline in February.

Core inflation posted another solid monthly gain, up 0.2 percent. The central bank lifted rates earlier this month owing to an improved economy and higher inflation.

The data follow Thursday's fourth-quarter GDP report that showed consumer spending climbed at a 3.5 percent annualized rate.

Personal income, meanwhile, rose by a seasonally adjusted 0.4% in January, in line with expectations. Accounting for inflation, so-called real consumption actually fell 0.1 percent, the second straight decline. Spending on goods was also weak, with purchases of long-lasting durable goods such as autos down 0.1 percent.