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January Income, Spending Rise, But So Does Inflation

Reuters
Friday, 29 Feb 2008 | 8:39 AM ET

U.S. personal income and personal spending in January rose more than expected, but inflation ate up a bigger portion of these as a key price index also rose, a government report showed on Friday.

The Commerce Department reported that January personal spending rose by 0.4 percent, while personal income rose by 0.3 percent. Analysts polled by Reuters had forecast both personal
income and spending to rise by 0.2 percent.

Cash Register
Paul Sakuma
Cash Register

The personal consumption expenditure price index, a key measure of inflation, rose 0.4 percent in January after an upwardly revised increase of 0.3 percent in December. Excluding volatile food and energy costs, the personal consumption expenditure index rose 0.3 percent - in line with analysts' expectations and the steepest monthly rise since September 2007.

On a year-over-year basis, this core index rose 2.2 percent, matching the prior months' gain. The personal saving rate, meanwhile, stood at negative 0.1 percent, marking the third straight month in negative territory.

The report comes a day after the government reported that the economy skidded to a near halt in the final quarter of last year, clobbered by dual slumps in housing and credit that caused people and businesses to spend and invest more sparingly.

The Commerce Department reported Thursday that the gross domestic product increased at a scant 0.6 percent pace in the October-to-December quarter. The reading -- unchanged from an initial estimate a month ago -- underscored just how much momentum the economy has lost. In the prior quarter, the economy clocked in at a brisk 4.9 percent pace.

Gross domestic product measures the value of all goods and services produced in the United States and is the best barometer of the country's economic health.

Economists had thought the newly released fourth-quarter GDP would have been bumped up to a 0.8 percent growth rate.

As if the newly confirmed fourth-quarter GDP figure of 0.6 percent wasn't chilling enough, the Labor Department reported Thursday that new applications for unemployment insurance benefits rose by 19,000 to 373,000 last week, more evidence that the general economic sluggishness is spilling over into the job market.

Fears have grown that the country is heading for a recession or is already in one.

The National Association for Business Economics expects economic growth in the current January-to-March quarter to slow to a meager 0.4 percent pace. Some analysts believe the economy's performance could be even worse and actually shrink during this period. Under one rough rule, the economy would have to contract for six months in a row for the country to be viewed as in a recession.

With risks lurking that the problems could intensify and further hurt the economy, Federal Reserve Chairman Ben Bernanke made clear he stands ready to lower a key interest rate again. The Fed, which started cutting interest rates to bolster the economy in September, has turned much more aggressively recently. In eight days in January, the Fed slashed rates by 1.25 percentage points -- the biggest one-month reduction in a quarter-century. Rates are expected to move lower at the Fed's next meeting on March 18.

Bernanke, however, is hopeful that previous rate reductions and the $168 billion economic aid plan of tax rebates for people and tax breaks for business will energize the economy in the second half of 2008.

A gauge of inflation linked to the GDP report showed that "core" prices -- excluding food and energy -- grew at a rate of 2.7 percent in the fourth quarter. The inflation reading -- although unchanged from the government's initial estimate -- showed that inflation had picked up sharply from the third quarter's 2 percent pace.

The inflation figure is above the Fed's comfort zone -- the upper bound of which is a 2 percent inflation rate.

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