updated 3/30/2007 8:52:46 AM ET 2007-03-30T12:52:46

Despite a sluggish economy, consumers spend more in February as their incomes showed strong gains. Underlying inflation pressures rose at the fastest pace in six months, however.

Major Market Indices

The Commerce Department reported that consumer spending was up 0.6 percent last month, the best showing since December, while personal incomes also rose by 0.6 percent.

Both figures were double what had been expected and should help to alleviate recession fears that have been growing because of a deeper-than-expected slump in housing and troubles in the domestic auto industry.

The report showed that an inflation barometer that excludes energy and food shot up by 0.3 percent in February, the biggest increase since a similar rise last August.

That left core inflation rising by 2.4 percent over the past 12 months, significantly higher than the Federal Reserve’s 1 percent to 2 percent comfort zone. The year-over-year increase has not been exceeded since a 2.5 percent jump in April 1995.

Fed Chairman Ben Bernanke told Congress on Wednesday that inflation remained the central bank’s predominant concern but that risks to economic growth had also risen. Bernanke’s testimony dashed hopes in financial markets that the central bank, which has kept interest rates unchanged since last June, might soon move to cut rates in an effort to bolster a faltering economy.

Bernanke said the biggest risks to the Fed’s forecast for continued economic growth were the housing slump and the possibility that the slowing economy might prompt businesses to cut back on their investment plans.

The 0.6 percent increase in incomes followed an even bigger 1 percent surge in January, an increase which reflected $50 billion at an annual rate in bonus payments to business executives.

The 0.6 percent rise in consumer spending followed a 0.5 percent January increase and was the best showing since a 0.7 percent jump in December, during the all-important Christmas shopping season. After adjusting for inflation, the February rise in spending was a more moderate 0.2 percent.

Even with the rise in incomes, the savings rate remained in negative territory for the 23rd consecutive month. It was unchanged in February at a negative 1.2 percent of after-tax incomes, the same as in January.

This means that consumers spent all they earned in February and dipped into savings and increased borrowing to finance purchases during the month.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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