Spending rose by the most in seven months in February, raising hopes that first quarter economic growth may have been stronger than expected.
The Commerce Department reported Friday that spending increased by 0.8 percent last month, versus an upwardly-revised 0.4 percent gain in January. Economists polled by Reuters had expected spending, which accounts for two-thirds of U.S. economic activity, to rise 0.6 percent last month.
When adjusted for inflation, spending rose 0.5 percent, the largest gain since September, after gaining 0.2 percent in January. That could cause analysts to raise their forecasts for 2 percent first-quarter growth.
"Personal spending was more robust than expected and that's very encouraging. The increase in spending ties in with better employment data," said Boris Schlossberg, director of FX research at GFT.
The economy expanded at an annual rate of 3 percent in the final three months of 2011 as it got a boost from restocking by businesses, a stimulus that is expected to be lost this quarter.
Consumer spending rose at a 2.1 percent rate in the fourth quarter and last month's increase suggested consumers were taking surging gasoline prices in stride, and saving less to supplement their low income.
Spending on goods meant to last more than three years rose 1.6 percent in February after advancing 1.4 percent the prior month. Spending on services rose 0.4 percent. Unseasonably warm weather had curbed demand for utilities in the prior months.
Last month income edged up 0.2 percent after rising by the same margin in January. The increase was below below economists' expectations for a 0.4 percent rise.
Taking inflation into account, the amount of income available to households after accounting for taxes and inflation, fell 0.1 percent after declining 0.2 percent in January.
With consumption outpacing income, the saving rate dropped to 3.7 percent, the lowest rate since August 2009.
The report showed mild inflation pressures, which should help to support spending.
A price index for personal spending rose 0.3 percent in February after increasing 0.2 percent the prior month. In the 12 months through February, the PCE index was up 2.3 percent. It increased 2.4 percent in January.
A core inflation measure, which strips out food and energy costs, edged up 0.1 percent last month after rising 0.2 percent in January. In the 12 months through February, core PCE rose 1.9 percent after increasing by a similar margin in January.
The Federal Reserve would like this measure close to 2 percent.
Reuters contributed to this report.