Consumers’ earnings and spending climb

U.S. consumers, helped by bigger paychecks and lower gasoline prices, boosted their spending last month, according to a government report Monday that may counter fears of a sharp economic slowdown.

The Commerce Department said personal income rose by 0.5% in September, exceeding analysts’ forecasts for a 0.3% gain. The August figure was revised upward to 0.4%.

Real disposable income, which excludes inflation and taxes, rose at its fastest pace in a year in September at 0.8%, helping to pad consumer spending at a time when concerns are growing about the economic effect of the housing slump.

The growth in income coincided with falling gasoline prices, which pushed down consumer prices by 0.3% in September.

The report “was positive in almost every major dimension that is critical for the sustainability of the business expansion,” said Brian Bethune, U.S. economist for Global Insight Inc. in Lexington, Mass.

The report came just days after the government said third-quarter gross domestic product rose a scant 1.6%, but it did not provide encouragement for investors who were hoping the Federal Reserve would cut interest rates soon. Also, Richmond Federal Reserve Bank President Jeffrey Lacker said Monday that inflation was still too high.

The Commerce Department said personal spending rose 0.1% in September, slightly below analysts’ forecasts of a 0.2% increase. But adjusted for inflation, consumption spending rose a solid 0.4% after a surprise drop of 0.1% in August.

Wages and salaries increased 0.5% after a 0.2% rise in August.

Also, the personal saving rate as a percentage of disposable personal income improved to a negative 0.2% from negative 0.5% the month before. This was the best rate since May 2005, but it was the 18th consecutive month in which consumers spent more than their disposable income.

U.S. consumer prices, excluding food and energy costs, rose by an expected 0.2% in September, showing some deceleration from the 0.3% increase in August.

Compared with a year earlier, the core personal consumption expenditures index showed an increase of 2.4%, just below August’s 11-year high of 2.5%. Although that figure slipped a notch, it remained well above the Fed’s historical comfort zone of 1% to 2%.

Some analysts expressed relief that core inflation was decelerating, but others warned that the report was not likely to tip the Fed toward cutting interest rates.

Just as the data were released, the Richmond Fed’s Lacker said that core inflation was running at an unacceptable rate on a long-term basis and that the outlook for prices was “discomforting.”

“The longer inflation remains elevated, the more difficult it will be to bring it back down,” he said, adding that the economy was “resilient enough right now to withstand further tightening.”

Investors for weeks have been trying to gauge when the Fed is likely to begin cutting rates again.