By Lucia Mutikani
WASHINGTON (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 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 U.S. economic activity, edged up 0.1 percent. That was the smallest gain since August and followed an unrevised 0.2 percent rise in January.
Economists had expected a 0.2 percent 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 percent 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 percent annualized rate in the fourth quarter, stepping down from the July-September quarter's brisk 3.5 percent pace.
Despite signs of moderate growth, the Federal Reserve is expected to raise interest rates at least twice more this year. The U.S. central bank raised its benchmark overnight interest rates by a quarter of a percentage point this month.
Prices for U.S. Treasuries fell on the data, while the dollar was little changed against a basket of currencies. U.S. stock index futures were slightly lower.
With consumer confidence at 16-year highs and labor 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 percent last month after jumping 0.4 percent in January. That lifted the year-on-year rate of increase in the PCE price index to 2.1 percent, the biggest gain since April 2012. The PCE price index rose 1.9 percent in January.
Excluding food and energy, the so-called core PCE price index increased 0.2 percent last month after rising 0.3 percent in January. In the 12 months through February, the core PCE price index increased 1.8 percent after a similar gain in January.
The core PCE is the Federal Reserve's preferred inflation measure and is running below its 2 percent 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 percent in February after declining 0.2 percent in January.
That suggests a sharp deceleration in the pace of consumer spending after a robust 3.5 percent growth rate in the fourth quarter.
Personal income rose 0.4 percent last month after advancing 0.5 percent in January. Wages increased 0.5 percent, the biggest gain in five months.
Income at the disposal of households after accounting for inflation increased 0.2 percent after dipping 0.1 percent in January. Savings rose to a five-month high of $808.0 billion from $770.9 billion in January.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci)