Monday, August 4, 2008

Honey, Inflation ate my rebate check


from nytimes.com
August 5, 2008
Higher Prices Outpace June Spending by Consumers
By CATHERINE RAMPELL

Consumer spending increased in June, but those gains were outpaced by rising prices, the Bureau of Economic Analysis reported Monday.

The increase in spending was $57.1 billion, or 0.6 percent, from May, but prices rose 0.8 percent in the month. It was the highest inflation level in the monthly report since September 2005.

The decrease in consumer spending after accounting for inflation reversed the trend in May, when stimulus checks from the federal government helped produce a real increase in spending.
“This is a kind of ‘Honey, inflation ate my rebate check’ story,” said Jared Bernstein, senior economist at the Economist Policy Institute.

Inflation was driven primarily by food and energy prices. Excluding food and energy, prices rose 0.3 percent in June, compared with 0.2 percent in May. The prices of nondurable goods — propelled mostly by food and energy, but also including things like clothing and toiletries — were up 7.3 percent year over year, the highest level since July 1981.

Markets fell this morning in response to the news before recovering in midday, largely on news of a sharp one-day decline in oil prices.

Monday’s announcement followed a tepid report last week on economic growth, which showed a mild positive annual growth rate of 1.9 percent for the second quarter in gross domestic product.
While the numbers in the spending report were not as dire as many had forecast, they still indicate months of challenges to come.

“That real consumer spending is down two-tenths in June is not a good thing in and of itself, but it also is a bad thing for what it means for third-quarter consumption,” said Michael Feroli, an economist at JPMorgan Chase. “To get positive consumption growth in the third quarter is going to be very challenging, especially with things like auto sales down as much as they are.”

The real drop in spending from May could also be due to the dwindling effects of the Economic Stimulus Act of 2008, which rolled tax rebates in consumers’ pockets starting in April. Real consumer spending had risen 0.3 percent in May, according to revised estimates. Dean Maki, chief United States economist at Barclays, said he expects that rebates will continue to pump a minor boost for several months, however.

The decreasing effect of rebates also resulted in personal income and disposable personal income numbers heading in opposite directions.

Personal income increased in June by only 0.1 percent, and disposable personal income — which is personal income less taxes — decreased 1.9 percent. Adjusted for inflation, disposable personal income decreased 2.6 percent in June.

“What you had in the way rebates got counted was, for most people, a reduction in taxes,” Mr. Feroli said. “That reduction was bigger in May than in June. Effectively, that increased taxes, and was a negative on disposable income.” The federal government issued rebate payments of $1.9 billion in April, $48.1 billion in May, and $27.9 billion in June.

Say Wha homie? Hoocoodanode?

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