Inflation tame in spending, income report

Key reading comes in below forecasts as income rises a bit less than expected, but still outpaces rise in spending.

NEW YORK ( -- Income gains outpaced increases in spending in June, according to a government report Tuesday, which also showed a key inflation reading coming in lower than expected.

Personal income rose 0.4 percent in the month, the same rise posted in May. Economists surveyed by had forecast a 0.5 percent rise in income.

Spending by consumers, which accounts for almost three-quarters of the nation's economic activity, rose 0.1 percent after a revised 0.6 percent gain in May. The increase was in line with economists' forecasts.

The so called core PCE deflator, which measures prices paid by consumers items other than food and energy, was up 0.1 percent in the month, the same increase seen in May. Economists had been looking for a 0.2 percent increase.

The increase in the core PCE deflator left those prices up 1.9 percent over the last year. The Federal Reserve is generally believed to be comfortable with a year-over-year rise of between 1 to 2 percent in that measure.

The annual change in the core PCE was down from a revised 2.0 percent rise in May, and the 1.9 percent increase marked the lowest gain since March 2004. But the May reading also had originally come in at a 1.9 percent increase.

The one area of the report that was of some concern was the relatively weak spending in the month. In fact without the even modest rise in prices, spending would have been unchanged. But the tame inflation reading was far stronger good news than the anticipated modest spending number.

A separate report from the Labor Department Tuesday showed that employment costs paid by private sector employers rose 0.9 percent during the second quarter, up from a 0.8 percent first quarter gain, due to an increase in the cost of benefits. But wage increases paid by those employers actually retreated to a 0.8 percent rise from a 1.1 percent gain in the first quarter. The overall rise in the Employment Cost Index was in line with economists forecasts and seen as another positive inflation reading.

"The Fed has nothing to fear from the benign rate of wage inflation at present," wrote Wachovia economist Jay Bryson in a note Tuesday.

The income and spending report was also the first in more than two years which showed Americans with a slightly positive savings rate, which means what spent was less than their after-tax income.

But the report including revisions of previous readings going back to January 2004, and the new estimates show most months over the last two years had a narrowly positive savings rate, rather than the previously reported negative savings rate.

The savings were still relatively narrow in the report, equal to 0.6 percent of disposable income in June. That means that for every $1,000 of take home pay, the average American saved only $6. Still it was an an improvement from the revised 0.4 percent savings rate in May. Top of page