Gas Prices Making Consumers Cautious

Consumers spent at a strong pace in April, but much of their money went to fill up their gas tanks. Soaring gas prices sent consumer confidence plunging while an inflation gauge closely watched by the Federal Reserve rose by the largest amount in 13 months.

The newest economic data released Friday depicted an economy slowing from the sizzling growth of the first three months of the year but one that was also being buffeted by rising inflation pressures.

The Commerce Department reported that consumer spending jumped 0.6% last month, the biggest increase since a 0.8% rise in January.

However, when inflation -- reflecting $3 or more for a gallon of gas -- was excluded, the increase in spending was a much smaller 0.1%.

The pain at the pump translated into a big drop in consumer confidence in May, according to the University of Michigan survey, which turned in a reading of 79.1, the lowest level in seven months.

“Consumers are becoming more cautious, having been body-slammed by the recent spike in gasoline prices, a cooler housing market and the cumulative impact of higher borrowing rates,” said Brian Bethune, an economist at Global Insight, a private forecasting firm.

An inflation reading tied to the personal spending report showed that core inflation -- excluding food and energy -- rose 2.1% in April compared with a year earlier.

That was the biggest such increase in 13 months, and it moved inflation above the Fed’s comfort zone of 1% to 2%.

The concern is that rising inflation pressures will prompt the Federal Reserve to keep boosting interest rates. The Fed has raised rates at 16 consecutive meetings over the last two years. Analysts are hoping signs of an economic slowdown will prompt the central bank to take a breather at its next meeting June 28-29.

Analysts said the weak consumer spending figures reported Friday bolstered their belief that GDP growth had slowed to a much lower rate, probably below 3.5% in the current quarter.

The government also reported Friday that personal incomes rose 0.5% in April, matching the March gain, with the strength coming from the biggest increase in wages and salaries in the last year.

Disposable incomes rose 0.4% in April but actually fell 0.1% after inflation was taken into account.

The personal savings rate slipped to a negative 1.6%, the 11th consecutive month it has been in negative territory.