By Lucia Mutikani
WASHINGTON (Reuters) - Consumer spending unexpectedly rose in March, temporarily boosted by demand for utilities due to colder weather, according to data on Monday that did little to alter a picture of a cooling in the economy.
The Commerce Department said consumer spending advanced 0.2 percent last month after a 0.7 percent rise in February.
The increase, which beat economists expectations for a flat reading, was driven by higher spending on services as outlays on utilities posted a second straight month of hefty gains. Spending on goods, a key measure of underlying demand, fell.
"Utilities made up a pretty decent chunk of spending," said Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pennsylvania. "When you extract from that, spending was less than impressive in March. The economy is slowing."
The economy's weakness was underscored by a sharp cooling in inflation, with a price index for consumer spending falling for the first time since November. A core reading that strips out food and energy costs was flat.
The combination of soft demand and benign inflation should allow the Federal Reserve to continue on its ultra-easy monetary path when it meets on Tuesday and Wednesday. The U.S. central bank is widely expected to keep purchasing bonds at a pace of $85 billion a month.
"The case for tapering the size of the Fed's monthly asset purchases is further reduced," said Michelle Girard, chief economist at RBS in Stamford, Connecticut. "However, we think the hurdle for the Fed boosting the monthly purchase pace is high."
Accounting for the drop in prices, inflation-adjusted spending grew 0.3 percent in March, matching February's increase. Spending on utilities on an inflation-adjusted basis recorded the largest increase since October 2001.
"Much of the upside in March was in a second straight enormous gain in utilities consumption, which appears likely to see a substantial reversal in coming months," said Ted Wieseman, an economist at Morgan Stanley in New York.
HOUSING REMAINS ECONOMIC BRIGHT SPOT
A private-sector report on Monday showed signed contracts to buy previously owned homes rose 1.5 percent last month to the highest level since April 2010, showing underlying strength in the housing recovery even though the pace of sales growth has cooled in recent months.
Prices for longer-dated U.S. government bonds rose on the inflation reading, while the dollar fell against a basket of currencies. Stocks on Wall street rose as investors also focused on the upbeat housing data.
The U.S. economy grew at a 2.5 percent rate in the first quarter, accelerating from a 0.4 percent rate in the last three months of 2012. But a range of data from retail sales to factory activity weakened in March, and growth estimates for the second quarter are currently in a range of 1.0 percent to 1.5 percent.
Some economists, however, said the better-than-expected reading on consumer spending in March, and the cooling in inflation, could mean those forecasts are understated.
"This makes it much more likely than we thought for real consumer spending to post a solid gain in the second quarter and increases the chances that real GDP growth in the second quarter will come in above 2 percent," said John Ryding, chief economist at RDQ Economics in New York.
FALLING PRICES LEND A HAND
The data on spending showed that consumer prices rose just 1.0 percent over the last 12 months, the smallest gain in nearly 3-1/2 years and down from a 1.3 percent rise in February.
The deceleration extended to core prices, which were up 1.1 percent from a year ago after advancing 1.3 percent the prior month. The March increase was the smallest in two years and well below the Federal Reserve's 2 percent target.
The lack of inflation is helping to support the purchasing power of U.S. households. Income at the disposal of households after inflation and taxes increased 0.3 percent last month after a 0.7 percent gain in the prior month.
With income growth matching spending, the saving rate - the percentage of disposable income households are socking away - was unchanged at 2.7 percent.
(Additional reporting by Margaret Chadbourn; editing by Andrea Ricci, Tim Ahmann and Leslie Adler)