US consumer spending cools

Published August 5, 2008

WASHINGTON, Aug 4: US consumer spending cooled in June and inflationary pressures accelerated strongly as higher food and energy costs stretched Americans’ wallets, a government survey showed on Monday.

The monthly Commerce Department snapshot also showed that Americans’ incomes moderated in June after both spending and income got a hefty boost in May from a vast emergency economic stimulus.

The survey was released a day before a Federal Reserve panel meets to mull US interest rates.

The central bank panel is widely expected to leave its key base rate firmly anchored at 2.0 per cent, although economists said inflation risks may trigger a hot debate.

Consumer spending rose 0.6 per cent in June from May while incomes rose a mild 0.1 per cent, marking the weakest rise in incomes since April 2007.

Both readings were nonetheless stronger than expected as most economists had forecast that spending increased 0.5 per cent and incomes contracted 0.1 per cent.

“The treadmill is going faster than the legs, at least when it comes to consumers and their spending. Household consumption surged in June but much of that went to purchase higher-priced food and energy,” said Joel Naroff, chief economist at Naroff Economic Advisors.

On the inflation front, the PCE (personal consumption expenditures) price index spiked 0.8 per cent in June -- its strongest monthly gain since 1997 -- following a gain of 0.5 per cent in the prior month.

The core PCE rate, which strips out volatile food and energy costs, increased 0.3 per cent, its biggest increase since September of last year.

Although world oil prices have declined slightly in recent weeks from record peaks over $147 a barrel, the report showed inflation pressures continue to buffet the world’s biggest economy.

In the year to June, headline inflation has jumped 4.1 per cent, marking its largest annual gain since May 1991, while the core rate has risen 2.3 per cent over the same period.Economists said the report had not changed their predictions for the outcome of Tuesday’s Fed meeting.

But they said some members of the Fed panel could be concerned by increased inflationary pressures and may put forward a stronger argument for hiking rates.

But analysts said a rate hike is unlikely Tuesday as the central bank hopes low rates will help spark a recovery in the housing market and soothe the credit crunch roiling the banking sector.

Consumer spending had accelerated at a 0.8 per cent clip in May while incomes rose a revised 1.8 per cent. Both measures received a shot in the arm from the government’s 168-billion-dollar economic stimulus, which was stuffed with one-off tax rebates.

The administration of President George W. Bush approved the stimulus to fire up US economic growth which has been dented by a continuing housing slump, the credit squeeze and surging fuel prices.—AFP

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