Higher costs raise consumer spending
The government said Friday that Americans spent more in January, not because they bought significantly more goods and services but because they paid more for what they did purchase.
Consumer spending, which accounts for two-thirds of all economic activity, rose 0.4% in January from December, the Commerce Department said. That would normally be greeted as good news, demonstrating that people were buying things they wanted while powering the economy forward.
The problem: Prices rose at almost the same clip as spending. After adjusting for inflation, spending essentially flat-lined for the second consecutive month.
“People are spending more dollars, but they are not getting more stuff,” said Nigel Gault, chief U.S. economist at forecasting firm Global Insight in Lexington, Mass.
Despite higher prices and a weakening economy, Americans are trying valiantly to maintain their living standards, analysts said.
In fact, January’s 0.4% rise in consumer spending easily outstripped a 0.1% increase in personal income during the month. As a result, Americans’ savings rate skidded back into negative terrain after hovering slightly above zero for much of last year.
But the effort to keep consumption up despite inflation will be hard to sustain, said Roger Kubarych, chief U.S. economist at New York-based UniCredit Global Research.
“Inflation is really starting to hurt, and Americans are resisting cutting their spending much to account for it,” he said. “The adjustment [to higher inflation] really hasn’t started yet.”
If Kubarych is correct, consumers are likely to substantially curb their spending in coming months, feeding an economic slowdown that’s already well underway. The government’s latest figures show that the economy grew at only a 0.6% annual rate in the fourth quarter, a sharp drop from the 4.9% rate in the third quarter.
The Commerce Department said its inflation measure, called the personal consumption expenditure deflator, showed prices climbing 0.4% in January, up a tenth of a percentage point from December. The so-called core deflator, which measures price trends excluding volatile food and energy prices, was up 0.3% for the month and 2.2% over the last year.
But fear of inflation is considered unlikely to offset policymakers’ fear of recession induced by the credit crunch. The Federal Reserve fights inflation by raising interest rates. It fights recession and credit crunches by cutting rates. The central bank is widely expected to cut rates further this month, by as much as half a point.