Consumer Spending Rises; Key Inflation Gauge Tame

U.S. personal spending rose by a more-than-expected 0.8 percent in May as government stimulus checks bolstered household budgets, government data showed, while a key gauge of inflation stayed tame.

Personal spending, under scrutiny as a barometer of how consumers behave as they received a fiscal boost of $48 billion in May amid a cooling economy, had been forecast by analysts polled by Reuters to increase 0.6 percent.

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The rise was the largest increase in personal spending since November, and compared with a 0.4 percent rise in April.

The Commerce Department said personal income advanced 1.9 percent in May, the largest gain since September 2005, and followed a 0.3 percent increase the month before.

Disposable income jumped 5.7 percent in May, the largest increase since May 1975, thanks in large part to the stimulus checks.

The Commerce Department said that without that boost disposable personal income would have been up 0.4 percent.

The Federal Reserve hopes consumer spending will continue to hold up once the tax rebate checks have been cashed, but some economists fear the economy will shift down another gear in the months ahead as this support fades away.

The U.S. central bank halted a powerful interest rate cut campaign on Wednesday, after slashing interest rates by 3.25 percentage points to 2 percent since mid-September to shield the U.S. economy from the housing slump.

Americans also saved much more than they had in years, with the personal saving rate jumping to 5 percent last month, or $555.7 billion at an annual rate, the highest since records began in 1959.

"We had very strong consumer spending, but most of the tax rebates went into savings, which might mean that they are going to stay there," said Pierre Ellis, senior economist at Decision Economics in New York.

The government's Economic Stimulus Act, rushed into law as an emergency measure to prevent a collapsing housing market from toppling the economy into a recession, will deliver an extra $106.7 billion to American households this year.

The bulk of the money arrived from the end of April onward and will begin to dry up by the middle of July.

The overall price index for consumer spending rose 0.4 percent in May after a 0.2 percent gain the month before.

Excluding volatile food and energy prices, the core price index, which is the Federal Reserve's preferred measure of inflation, edged up by 0.1 percent.

This compared with a forecast for a 0.2 percent rise after an 0.1 percent April increase.

U.S. government Treasury bonds and Wall Street stock futures took heart from the subdued inflation reading despite oil prices at a record $142 per barrel.

"The deflator data was relatively friendly for bonds.

The core PCE is still a little bit above the Fed's comfort zone, but it has held steady for the past several months," said Kim Rupert, global fixed income analyst at Action Economics LLC.

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