NEW YORK, March 31 U.S. Treasury debt yields edged higher on Friday after data showed the largest annual increase in U.S. inflation in almost five years, underpinning more interest rate hikes by the Federal Reserve this year.
Rising incomes and confidence haven't accelerated consumer spending, which posted its smallest gain in six months in February, the Commerce Department said Friday.
Weak consumer spending suggested that economic growth slowed further in the first quarter.
"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.
Meanwhile, an inflation gauge closely watched by the Federal Reserve increased 2.1% in February compared to a year ago. That's the sharpest 12-month rise since March 2012 and slightly above the Fed's 2 percent inflation target. It was the strongest annual gain for the price.
Disposable income, or the money left over after taxes, increased 0.2 percent after adjusting for inflation. That was fastest annual rate in almost five years.
Consumer spending accounts for 70 percent of economic activity, so any sign of slowdown is a potential concern. That was after rising 0.5% a month earlier that was revised up from an initial 0.4% increase. The core rate has climbed 1.8% in the past 12 months.
The data released Friday also showed that consumer spending cooled during the month. It's the first time the yearly rate of inflation topped 2% since March 2012.
Stripping out the contributions from food and energy, the most volatile categories, the PCE deflator rose by 0.2% on the month (consensus: 0.2%) and was 1.8% ahead in annualised terms, the same as in January. Wages increased 0.5 per cent, the biggest gain in five months.
While inflation is now back to levels more palatable to the Fed, the upturn has taken a bite out of real consumer spending.
Income at the disposal of households after accounting for inflation increased 0.2% after dipping 0.1% in January.