WASHINGTON (Reuters) - U.S. consumer spending barely rose in February and inflation retreated, suggesting the Federal Reserve could remain cautious about raising interest rates this year even as the labor market rapidly tightens.
Monday's report from the Commerce Department also showed consumer spending in January was not as strong as previously reported. That, together with other data showing a widening in the goods trade deficit in February, indicated economic growth remained sluggish in the first quarter.
"It speaks to the weakening in domestic economic momentum at the start of this year, further reinforcing the Fed's cautious monetary policy bias," said Millan Mulraine, deputy chief economist at TD Securities in New York.
Consumer spending edged up 0.1 percent as households cut back on goods purchases after a downwardly revised 0.1 percent gain in January. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was previously reported to have increased 0.5 percent in January.
When adjusted for inflation, consumer spending rose 0.2 percent. Inflation-adjusted consumer spending for January was revised down to show it unchanged rather than the 0.4 percent rise that was previously reported.
Given labor market strength and cheap gasoline, economists speculated that consumption had been hampered by a massive stock market sell-off at the start of the year which eroded consumer confidence.
In a separate report, the Commerce Department said the advance goods trade deficit widened to $62.9 billion in February from $62.2 billion, rising for a fourth straight month as an increase in exports was offset by a gain in imports.
The government will publish February's trade data, which includes services, on April 5.
In the wake of the consumer spending and trade data, economists slashed their first-quarter gross domestic product growth estimates by as much as half a percentage point to as low as a 0.9 percent annualized rate. The economy grew at a 1.4 percent pace in the fourth quarter.
The dollar fell against a basket of currencies on the data, while prices for U.S. government bonds rose marginally. U.S. stocks were little changed.
Inflation moderated last month, with a price index for consumer spending dipping 0.1 percent after nudging up 0.1 percent in January. In the 12 months through February, the personal consumption expenditures (PCE) price index increased 1.0 percent after rising 1.2 percent in January.
Excluding food and energy, prices gained 0.1 percent after advancing 0.3 percent in January. In the 12 months through February, the so-called core PCE price index increased 1.7 percent after a similar increase in January.
The core PCE is the Fed's preferred inflation measure and is running below its 2 percent target. The slowdown in the monthly core PCE reading came after Fed Chair Janet Yellen recently expressed skepticism over the sustainability of the gains in core inflation measures.
Yellen told reporters this month "there may be some transitory factors" behind the run-up in prices. Still, the annual core PCE rate held above the level that central bank policymakers expected it to be by the end of this year.
"While the data from January and February may overstate any underlying firming, we do think that the trend in core inflation is picking up," said Daniel Silver, an economist at JPMorgan in New York.
The still-soft inflation suggests the U.S. central bank will continue to gradually raise interest rates this year. New Fed projections published this month showed policymakers expect two quarter-point rate hikes by year-end, half the number seen in December.
The Fed hiked its benchmark overnight interest rate in December for the first time in nearly a decade.
Consumer spending last month was held back by a 0.7 percent drop in purchases of goods. Spending on services rose 0.4 percent.
Personal income rose 0.2 percent after rising 0.5 percent in January. The slowdown in income growth is likely temporary amid anecdotal evidence that the tightening jobs market, marked by an unemployment rate at an eight-year low of 4.9 percent and growing skills shortages, is driving up wages.
Households boosted savings to a more than three-year high last month. Higher savings and a firming housing market, which is bolstering household net worth, should support consumer spending this year.
In a third report, the National Association of Realtors said contracts to buy previously owned homes increased 3.5 percent in February to a seven-month high.
"As long as income growth remains steady, expect consumers to loosen their purse strings in the coming months," said Jay Morelock, an economist at FTN Financial in New York.
(Reporting by Lucia Mutikani; Editing by Paul Simao)