Income, spending gains slow

Inflation adjuster

How much would: $ in: be worth today? Today's dollars: $

NEW YORK (CNNMoney.com) -- Gains in both income and spending by consumers slowed in October, as both measures came in below expectations.

Income earned by individuals rose 0.2 percent in October, according to the Commerce Department report, trailing the 0.4 percent increase in September. Economists surveyed by Briefing.com had been expecting another 0.4 percent increase in the latest reading.

It was the weakest increase in income since April, when the same report showed a modest decline.

Spending by consumers also gained 0.2 percent in October, which again trailed the 0.3 percent rise in September. Economists had been expecting another 0.3 percent increase in spending.

The spending increase was the smallest gain since April and the third smallest monthly rise over the last 12 months. Along with the modest gains in income, the report seemed to be the latest sign of a slowing U.S. economy at the end of this year, heading into a 2008 in which most economists also expecting more modest growth.

Prices paid by consumers rose 0.3 percent, the same as the rise in September. The increase in prices means that the modest increase in spending was due to higher prices, not additional purchases by consumers, and income gains slightly trailed the increased prices.

"The income data may be providing a better indication of how much the economy is slowing down than some of the other numbers we've been getting lately," said Mark Vitner, senior economist with Wachovia.

When volatile food and energy prices were stripped out there was only a 0.2 percent rise, according to a closely watched inflation measure known as the core PCE deflator that is included in the report. That matched economists' forecasts, and could be a green light for the Federal Reserve to cut interest rates further at its next meeting.

The October increase left prices outside of food and energy up 1.9 percent over the last year, the same 12-month gain as the previous month.

The core PCE deflator is a favorite measure of policymakers at the Federal Reserve, who are believed to want to see it post a 12-month gain of between 1 and 2 percent. The combination of a reading in the central bank's comfort zone and the slowing of income and spending gains may mean the Fed could cut rates by as much as a half a percentage point, or 50 basis points, when it meets Dec. 11, according to Vitner.

"The Fed has the green light to cut 50 if they need to," said Vitner. "There's a good chance they'll go that way unless we see a particularly strong jobs report next Friday."

On Thursday night, Fed Chairman Ben Bernanke gave a speech in which he seemed to suggest the threat to economic growth from credit market disruptions might now be greater than the threat of increased price pressures.

The Fed's statement at its last meeting suggested those two threats were balanced, so Bernanke's speech was widely seen raising hopes for another rate cut at the next meeting.