Monday, October 02, 2006

Consumers cut spending in August while inflation jumps

Consumers cut spending in August while inflation jumps

WASHINGTON (AP) — Battered consumers, faced with weak income growth and rising inflation, trimmed their spending in August by the largest amount in nearly a year.

The Commerce Department reported Friday that consumer spending, after adjusting for inflation, dropped 0.1% last month, the first decline since a 0.3% fall in September 2005, a month when business activity was disrupted by Hurricane Katrina.

Core inflation, which excludes energy and food, was up a worrisome 2.5% compared to a year ago, the biggest year-over-year increase in more than a decade.

Core inflation rose 0.2% in August from July.

That 2.5% increase is well above the Federal Reserve's comfort range of core inflation increases from 1% to 2%. However, many economists believe the central bank, after raising rates for 17 consecutive times over two years, is through with its credit tightening, believing that a slowing economy will restrain inflation pressures going forward.

Incomes, reflecting lackluster gains in employment, rose just 0.3% in August, the weakest performance in nine months.

The report underscored how much the economy is slowing this year as consumers have been battered by record-high gasoline prices and a cooling housing market. Falling home prices are making Americans more cautious about spending money because they feel less wealthy.

The overall economy grew at an annual rate of just 2.6% in the April-June quarter, the government reported Thursday, and the report on consumer spending indicates that growth will likely slow even more in the current quarter.

However, most economists believe the country will be able to escape an outright recession, in part because trends in recent weeks have been more favorable with gasoline prices falling rapidly, helping to boost consumer confidence.

That development is expected to bolster consumer spending in the final months of this year, giving retailers a decent holiday sales season. Consumer spending is closely watched because it accounts for two-thirds of total economic activity.

Consumer spending before adjusting for inflation showed a tiny 0.1% rise, far below the 0.8% jump in the previous month.

The 0.1% decline in spending after adjusting for inflation followed a 0.5% rise in July. Much of the slowdown reflected a drop in auto sales in August following a strong July.

The 0.3% rise in incomes followed a 0.5% July gain and was the weakest showing since incomes edged up just 0.2% last November.

After-tax incomes were up 0.4% in August, the weakest increase since a similar 0.4% gain in May.

Americans' savings rate came in at a minus 0.5%, compared to a minus 0.7% in July. That marked the 17th consecutive month that the savings rate has been in negative territory. That means that Americans are spending all of their after-tax incomes and dipping into savings or borrowing to finance their purchases.

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