WASHINGTON, April 1 (Reuters) - U.S. retail sales increased by the most in seven months in February as motor vehicle purchases rebounded and temperatures warmed up, but surging gasoline prices because of war in the Middle East were expected to crimp spending in the months ahead.

The Commerce Department's delayed report on Wednesday suggested that the economy was on solid footing before the U.S.-Israeli war with Iran. The conflict, which started at the end of February, has sent global oil prices surging more than 50%, and the national average retail gasoline price this week topped $4 a gallon for the first time in more than three years.

A prolonged war and further increases in gasoline prices could offset some of the anticipated boost to consumer spending and the overall economy from tax cuts, economists warned. They expected the conflict to weigh on growth in the second quarter.

"I expect consumer spending to be softer in the first half of the year than would have been the case in the absence of the surge in gasoline prices, but I project that energy prices will recede significantly within a few months, allowing real outlays to rebound in the second half of the year," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.

Retail sales rose 0.6%, the largest increase since last July, after an upwardly revised 0.1% dip in January, the Commerce Department's Census Bureau said. Economists polled by Reuters had forecast retail sales, which are mostly goods and are not adjusted for inflation, rising 0.5% after a previously reported 0.2% drop in January.

The Census Bureau is still catching up on data releases following delays caused by last year's government shutdown.

Some of the increase in retail sales reflected higher gasoline prices, which had started rising in anticipation of the Middle East war. In addition to expensive gasoline, consumers are also facing higher prices at the supermarket stemming from President Donald Trump's tariffs.

The broad rise in sales was partly driven by tax refunds. The average refund was up $350 through March 20 compared to the same period in 2025, Internal Revenue Service data showed.

"Tax refunds are literally saving the economy's bacon in the first quarter," said Christopher Rupkey, chief economist at FWDBONDS. "Inflated consumer goods are more affordable at least until the income tax refunds run out."

Receipts at auto dealerships rebounded 1.2% amid promotions and discounts, after dropping 0.7% in January.

Sales at electronics and appliance stores increased 0.5%, while those at building material, garden equipment and supplies retailers rose 0.4%. Receipts at clothing and clothing accessories outlets rebounded 2.0%.

Nonstore sales, which include online retail, increased 0.7%. Sales at service stations rose 0.9%. Sales at sporting goods, hobby, musical instrument and book stores advanced 1.3%.

But furniture store sales dropped 1.0% as did food and beverage store receipts.

Sales at food services and drinking places, the only services component in the report and a gauge of discretionary spending, rebounded 0.4%. Economists view dining out as a key indicator of household finances, now under threat from the month-long conflict, which wiped off $3.2 trillion from the stock market in March. Higher-income households have led consumer spending, underpinned by robust wealth levels.

Stocks on Wall Street were trading higher. The S&P 500 index in March suffered its biggest monthly decline in a year. The dollar retreated against a basket of currencies. U.S. Treasury yields rose.

LONG DELIVERY TIMES AT FACTORIES

Retail sales excluding automobiles, gasoline, building materials and food services increased 0.5% in February after rising 0.2% in January. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Consumer spending slowed in the fourth quarter, helping to hold back GDP growth to a 0.7% annualized rate. The economy grew at a 4.4% pace in the third quarter.

The Atlanta Fed is estimating that GDP growth increased at a 1.9% rate in the first quarter. Those expectations were supported by an Institute for Supply Management survey, which showed its manufacturing PMI edged up to 52.7 in March, the highest reading since August 2022, from 52.4 in February.

It was the third consecutive month that the PMI was above the 50 level, which indicates expansion. Part of the increase in the index was likely because of lengthening suppliers' delivery times, normally associated with a strong economy and increased customer demand. In this instance, however, slower supplier deliveries likely indicate snarled supply chains because of shipping restrictions through the Strait of Hormuz and tariffs.

In addition to energy products, shipments of fertilizers and aluminum have also been impacted.

ISM Manufacturing Business Survey Committee chair Susan Spence noted that "64% of comments overall were negative," adding that "about 20% cited tariffs and about 40% the war in the Middle East."

Though the U.S. Supreme Court struck down Trump's sweeping import duties, he responded by imposing a global tariff.

The ISM survey's supplier deliveries index increased to 58.9 from 55.1 in February. A reading above 50 indicates slower deliveries. That is boosting inflation at the factory gate. The survey's prices paid measure accelerated to 78.3, the highest level since June 2022, from 70.5 in February. The rise mirrored a surge in producer goods prices.

Those higher prices will filter through to consumer inflation. The Cleveland Federal Reserve is forecasting the Consumer Price Index surged 0.84% in March, translating to a year-on-year increase of 3.25%. The CPI rose 0.3% in February and advanced 2.4% year-on-year. The Bureau of Labor Statistics is scheduled to release March's CPI report on April 10.

Some economists believe the Federal Reserve will not cut interest rates this year. The U.S. central bank left its benchmark overnight interest rate in the 3.50%-3.75% range last month.

In updated projections released alongside the decision, policymakers expected higher inflation and only a single reduction in borrowing costs in 2026.

"The resilience of consumer and business demand for goods will also be tested in the second quarter as prices rise," said Scott Anderson, chief U.S. economist at BMO Capital Markets. "Manufacturers are entering the second quarter on a more fragile foundation as a result."