U.S. Economy: Spending Eroded by Inflation, Chicago Index Drops (Shobhana Chandra)

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(Bloomberg) -- Inflation eroded gains in U.S. consumer spending and a gauge of business sentiment fell to the lowest level in more than six years, pushing the economy toward a recession.

While purchases rose 0.4 percent in January, the Federal Reserve's preferred measure of inflation climbed 0.3 percent, the most in four months, the Commerce Department said today in Washington. The National Association of Purchasing Management- Chicago said its index of business activity tumbled to 44.5 in February. Readings below 50 signal a contraction.

The reports pushed Treasury notes higher and stocks down. Confidence among consumers is waning as fuel costs jump and house values slide, leaving exports to drive factory production.

``There is no growth in consumption except to keep up with price increases,'' said Chris Low, chief economist at FTN Financial in New York. ``Consumers are clearly hard-pressed to maintain their standard of living and are cutting back.''