Consumer spending sinks in February while Americans were in between stimulus checks

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The numbers: Consumer spending posted the biggest decline in February in 10 months owing to harsh winter weather and a temporary respite in government stimulus payments, but new federal checks are expected to spawn a rebound in the next few months.

Consumer spending sank 1% last month, the government said Friday, marking the biggest drop since the onset of the coronavirus pandemic last year. That matched the forecasts of economists polled by Dow Jones and the Wall Street Journal.

Outlays had surged a revised 3.4% in January after the government sent out $600 stimulus checks to families and boosted unemployment benefits. So spending was expected to retreat in February.

Incomes tumbled 7.1% last month after leaping 10.1% in January.

The government is sending out $1,400 checks this month to most Americans and that’s expected to boost spending in March and April.

A key measure of inflation, meanwhile, rose 0.2% last month. The so-called PCE price index is the Federal Reserve’s preferred measure of inflation.

The price gauge has risen 1.6% in the past year — up from 1.4% in the prior month —- and is creeping closer to the Fed’s 2% target.

The yearly increase is the highest since February 2020, just before the pandemic reached the U.S.

What happened: Americans reduced spending on an array of goods and services in February, particularly drugs, recreational items and takeout food. That more than offset increases in outlays on housing, health care, utilities and gasoline due to higher prices.

Read: U.S. retail sales drop 3% in February before new round of stimulus checks

Inflation more broadly is on the rise again after a sharp decline early in the pandemic.

The central bank is prepared to let prices rise above its 2% goal for awhile after a period of very low inflation. The yearly rate of PCE inflation had fallen to as low as 0.5% in the early stages of the pandemic.

Many economists predict inflation will surpass 2% once the pandemic fades and the U.S. recovers.

See: A visual look at how an unfair pandemic has reshaped work and home

A separate “core” measure that strips out food and energy increased a smaller 0.1% last month. The core PCE has risen 1.4% in the past 12 months, a tick lower than in January.

The big picture: Consumer spending is sure to bounce back in March and April after the government’s latest stimulus. The economy is also getting a boost from a decline in coronavirus cases and increasing vaccinations.

If the pandemic continues to fade, the economy is likely to develop even more momentum. The coronavirus aside, the biggest worry among investors is that inflation will surge and force the Fed to raise interest rates earlier than it plans.

Fed officials dismiss the possibility and expect any increase in inflation to be mild and temporary.

Read: Inflation worries are back. Should you … worry?

Market reaction: The Dow Jones Industrial Average
DJIA,
+0.62%

and S&P 500
SPX,
+0.52%

were set to open higher in Friday trades.



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