Spending in US rises to exceed incomes

Spending in US rises to exceed incomes
By Andrew Balls in Washington
Published: March 1 2006 16:56 | Last updated: March 1 2006 18:21. Copyright by the Financial Times

Consumer spending jumped at the start of the year, as US households continued to demonstrate a willingness to spend more than their income, while the Federal Reserve’s preferred inflation measure was well-behaved.

Personal spending rose 0.9 per cent in January, compared with a 0.7 per cent increase in personal income, the Commerce Department reported. The rise in spending was slightly below the consensus forecast while the income gain was slightly above.

The biggest monthly gains in spending and income since last summer pointed to renewed momentum in the economy following the weak fourth quarter.

But the savings rate dropped to minus 0.7 per cent from minus 0.4 per cent in December. Economists expect that declining energy prices, income growth as the labour market tightens and a slowing housing market will all encourage the savings rate to improve.

Inflation and high energy prices took a bite out of consumer spending power, with the personal consumption expenditures (PCE) inflation rising 0.5 per cent in the month – after a flat reading in December – cutting real spending growth to 0.4 per cent.

But the core rate excluding food and energy was up 0.2 per cent in the month. In the 12 months to January, the core PCE rose 1.8 per cent, down from 1.9 per cent in the 12 months to December. The Fed is commonly described as having a 1-2 per cent comfort zone for core inflation.