U.S. consumer spending rose in January as Americans spent more on utilities, with savings providing a cushion after income recorded its biggest drop in 20 years.

The Commerce Department said on Friday consumer spending increased 0.2 percent in January after a revised 0.1 percent rise the prior month. Spending had previously been estimated to have increased 0.2 percent in December.

January’s increase was in line with economists’ expectations. Consumer spending accounts for about 70 percent of U.S. economic activity and when adjusted for inflation, it gained 0.1 percent after a similar increase in December.

Though spending rose in January, it was supported by a rise in services, probably related to utilities consumption after a cold snap during the month.

Spending on goods fell, suggesting some hit from the expiration at the end of 2012 of a 2 percent payroll tax cut. Tax rates for wealthy Americans also increased.

The impact is expected to be larger in February’s spending data and possibly extend through the first half of the year as households adjust to smaller paychecks, which are also being strained by rising gasoline prices.

“We expect a significant decrease in real consumer spending in the first half of the year,” said Yelena Shulyatyeva, U.S. economist at BNP Paribas, New York.

“We are looking for a very subdued Q1 reading, and that’s the effect from the fiscal tightening. That will weigh significantly on first-quarter GDP, which we expect at 1.2 percent.

GDP advanced at a 0.1 percent rate in the last three months of 2012, with consumer spending rising at a healthy 2.1 percent annual pace.

Income tumbled 3.6 percent, the largest drop since January 1993. Part of the decline was payback for a 2.6 percent surge in December as businesses, anxious about higher taxes, rushed to pay dividends and bonuses before the new year.

Taking into account the higher taxes that went into effect at the start of the year, the squeeze on households was even greater. The income at the disposal of households after inflation and taxes plunged a 4.0 percent in January after advancing 2.7 percent in December.

Excluding the unwinding of the dividend and bonus boost, disposable income increased 0.3 percent in January.

With income dropping sharply and spending rising, the saving rate – the percentage of disposable income households are socking away – fell to 2.4 percent, the lowest level since November 2007. The rate had jumped to 6.4 percent in December.

Savings were the smallest since December 2007.

Inflation was largely contained, even though gasoline prices pushed higher. A price index for consumer spending was flat for a second straight month.

That left its increase over the past 12 months at 1.2 percent, the smallest since October 2009. It increased 1.4 percent in December.

So-called core prices, which strip out food and energy costs, edged up 0.1 percent after being flat the prior month. The year-on-year gain was 1.3 percent, the smallest since April 2011 and well below the Federal Reserve’s 2 percent target.

The U.S. central bank last year embarked on an open-ended bond buying program and said it would keep it up until it saw a substantial improvement in the outlook for the labor market. It hopes the purchases will drive down borrowing costs.

Weak growth and benign inflation could compel the Fed to maintain it’s very easy monetary policy stance.

(Reuters)