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Income, spending higher than expected

Spending up mainly on price increases as inflation indicator comes in slightly above Federal Reserve's perceived target.

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By David Goldman, CNNMoney.com staff writer

Personal income and spending were higher than expected in January, but inflation remains outside of the Fed's 'comfort zone,' according to a government report.
Fed underrates inflation - expert
Economist from ShadowStats.com says inflation is much higher than the Federal Reserve is reporting.
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NEW YORK (CNNMoney.com) -- Consumer spending rose slightly last month, as rising prices forced Americans to shell out more, according to a government report released Friday.

The Commerce Department said spending by individuals rose 0.4% in January, but that was due primarily to inflation. In constant dollars, spending held flat.

"Consumers were a little more conservative," said Wachovia analyst Sam Bullard. "There is lots of pressure on the consumer now - they are holding discretionary purchases off."

Economists surveyed by Briefing.com had forecast a 0.2% gain in non-inflation-adjusted spending for the month. December's rise was revised to 0.3%.

The report's so-called core personal consumption expenditure (PCE) deflator - which measures prices paid by consumers for goods and services other than food and energy - rose 0.3% from December, meeting economists' expectations.

But the closely watched inflation gauge rose 2.2% from the same month a year ago. That's slightly above the 1% to 2% range for that measure that the Fed is believed to prefer.

The Fed has cut its key interest rate several times since September to boost the economy and stave off a recession. The central bank has slashed its key short-term interest rate to 3%, and many Wall Street investors believe another half-point rate cut is coming soon.

But Fed chairman Ben Bernanke said Thursday that rising inflation will make further rate cuts more difficult, as the central bankers not only seek to maintain economic growth, but aim to keep prices in check as well.

"The Fed believes that the continued economic slowdown should be enough to cut off inflationary pressures," said Bullard. "But there is still some risk, because of the much stronger global GDP outside the United States - we may not see so much relief in commodity prices."

Personal income rose 0.3% in January, after a 0.5% gain the previous month. Economists had forecast a 0.2% increase.

The rise in personal income outpaced the change in prices, leading to a 0.1% rise in real income in the period. It was the second straight month that income gains had outpaced price increases.

But since income gains did not outpace spending, consumers spent more than they saved, resulting in a savings rate of negative 0.1%, unchanged from December.

"This trend has been here for a while," said Bullard, who believes that consumers will jump at the chance to spend some extra money when taxpayers get their stimulus package rebate checks starting in May.

Congress recently passed a $168 billion economic stimulus plan in which more than 130 million households will receive tax rebate checks beginning in May. Treasury Secretary Henry Paulson said Thursday that the IRS would be mailing out letters reminding taxpayers to file their tax returns to receive their check.

"Historically, when consumers have money in their hands, they will spend it," Bullard added. To top of page

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