U.S. consumer spending retreats in February; inflation cools

By Lucia Mutikani

WASHINGTON (Reuters) -U.S. consumer spending rose moderately in February, and while inflation cooled, it remained elevated enough to possibly allow the Federal Reserve to raise interest rates one more time this year.

The slowdown in consumer spending reported by the Commerce Department on Friday followed the largest gain in nearly two years in January. Consumer spending, which remains supported by a tight labor market, appears on track to pick up this quarter after growing at its slowest pace in 2-1/2 years in the fourth quarter.

“First-quarter GDP growth looks to come in better than expected, though there is still a reasonable chance that consumers and the economy pull back a bit by mid-year,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “For the Fed, it could be one and done in May.”

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased 0.2% last month. Data for January was revised higher to show spending vaulting 2.0% instead of the previously reported 1.8%. January’s increase was the biggest since March 2021. Economists polled by Reuters had forecast consumer spending would gain 0.3%.

Spending last month was supported by both goods and services. Consumers increased spending on housing and utilities as well as on healthcare, but they cut back on spending at restaurants, bars and hotel accommodation.

Goods outlays were lifted by higher gasoline prices. There was also an increase in spending on pharmaceutical products as well as food and beverages, but motor vehicle purchases fell.

“The economy looks strong today, but the outlook is still in doubt as banks may pull back on the credit they provide to help the economy grow,” said Christopher Rupkey, chief economist at FWDBONDS in New York.

Financial market stress following the recent collapse of two regional banks has amplified the risk of a recession later this year. Banks have tightened lending standards, which could make it harder for households to access credit, weighing on demand.

U.S. stocks opened higher. The dollar rose against a basket of currencies. U.S. Treasury yields mostly fell.

The Fed last week raised its benchmark overnight interest rate by a quarter of a percentage point, but indicated it was on the verge of pausing further increases in borrowing costs in a nod to the financial market turmoil. The U.S. central bank has hiked its policy rate by 475 basis points since last March from the near-zero level to the current 4.75%-5.00% range.

The personal consumption expenditures (PCE) price index increased 0.3% last month after accelerating 0.6% in January. In the 12 months through February, the PCE price index advanced 5.0% after rising 5.3% in the 12 months through January.

Excluding the volatile food and energy components, the PCE price index climbed 0.3% after increasing 0.5% in January. The so-called core PCE price index rose 4.6% on a year-on-year basis in February after gaining 4.7% in January. The Fed tracks the PCE price indexes for its 2% inflation target.

Personal income rose 0.3%, driven mostly by wage gains. The personal saving rate climbed to 4.6% from 4.4% in January.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Paul Simao)