By Lucia Mutikani

WASHINGTON (Reuters) – U.S. consumer spending fell for a second straight month in December amid renewed business restrictions to slow the spread of COVID-19 and a temporary expiration of government-funded benefits for millions of unemployed Americans.

The report from the Commerce Department on Friday also showed inflation steadily picking up last month. Stirring price pressures were also corroborated by other data showing a solid increase in labor costs in the fourth quarter. Though inflation is expected to breach the Federal Reserve’s 2% target this year, the U.S. central bank is seen maintaining its ultra-easy policy stance for a while as the economy battles the COVID-19 pandemic.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, slipped 0.2% last month as outlays at restaurants declined. Spending at hospitals also fell, likely as consumers stayed away in fear of contracting the coronavirus.

Households also cut back spending on recreation. Consumer spending tumbled 0.7% in November. Economists polled by Reuters had forecast consumer spending falling 0.4% in December.

When adjusted for inflation, consumer spending decreased 0.6% in December after dropping 0.7% in November. That likely sets a lower base for consumer spending in the first quarter.

The data was included in Thursday’s advance gross domestic product report for the fourth quarter, which showed the economy growing at a 4% annualized rate after a record 33.4% pace in the third quarter. Consumer spending rose at a 2.5% rate last quarter following a spectacular 41.0% growth pace in the July-September period.

Economic growth is expected to decelerate to below a 2% rate in the first quarter as it works through the disruptions from a virus surge in winter. The government provided nearly $900 billion in additional relief in late December. This together with an anticipated pick-up in the distribution of vaccines is likely to spur growth by summer.

President Joe Biden has also unveiled a recovery plan worth $1.9 trillion, though the package is likely to be pared down amid worries about the nation’s swelling debt.

U.S. stocks opened lower after Johnson & Johnson said its single-dose vaccine was 72% effective in preventing COVID-19 in the United States, but a lower rate of 66% was observed globally. The dollar was steady against a basket of currencies. U.S. Treasury prices were lower.

INCOME REBOUNDS

The late December stimulus package included direct cash payments to some households and renewed a $300 unemployment supplement until March 14. Government-funded programs for the self-employed, gig workers and others who do not qualify for the state unemployment programs as well as those who have exhausted their benefits were also extended.

Last month, personal income rebounded 0.6%, boosted the unemployment benefits payouts as well as a rise in wages. Income tumbled 1.3% in November. Americans increased savings last month. The saving rate rose to 13.7% from 12.9% in November.

Despite weak consumer spending inflation edged higher. The personal consumption expenditures (PCE) price index excluding the volatile food and energy component increased 0.3% after being unchanged in November. In the 12 months through December, the so-called core PCE price index increased 1.5% after advancing 1.4% in November.

The core PCE index is the preferred inflation measure for the Fed’s 2% target, a flexible average.

The gradually firming inflation environment was reinforced by separate report from the Labor Department on Friday showing its Employment Cost Index, the broadest measure of labor costs, rose 0.7% last quarter after advancing 0.5% in the third quarter. That lifted the year-on-year rate of increase to 2.5% from 2.4% in the third quarter.

The ECI is widely viewed by policymakers and economists as one of the better measures of labor market slack and a predictor of core inflation as it adjusts for composition and job quality changes. Economists had forecast the ECI climbing 0.5% in the fourth quarter.

Wages and salaries increased 0.9% after gaining 0.4% in the third quarter. They were up 2.6% year-on-year. The private sector accounted for the surge in wages and salaries. Benefits rose 0.6%, matching the third quarter’s increase.

Inflation is seen accelerating as weak readings last March and April drop from the calculation. It is also expected to be boosted by a strengthening in economic growth, driven by fiscal stimulus and the inoculation of more Americans against COVID-19.

Bottlenecks in the supply chain are expected to contribute to higher inflation. Recent manufacturing surveys have shown a surge in price measures for both raw materials and finished products.

(Reporting by Lucia Mutikani; Editing by Hugh Lawson and Andrea Ricci)