Consumer spending in the U.S. rose 0.8 percent last month, the most since January, and a measure of inflation posted the smallest gain of the year.
The rise in spending followed a 0.4 percent June increase, the Commerce Department said today in Washington. The Federal Reserve’s preferred inflation gauge rose a smaller-than-expected 0.1 percent last month.
The report’s price gauge tied to spending patterns and excluding food and energy costs increased 2.4 percent from July 2005, a year-over-year gain last exceeded in April 1995.
Fed Chairman Ben S. Bernanke is among policy makers who have said they would be more comfortable with a 1 percent to 2 percent increase in the measure over a 12-month period.
Because the increase in spending was larger than the gain in incomes, the savings rate fell to minus 0.9 percent, from minus 0.7 percent in June. The rate has been negative for 16 straight months, indicating consumers are dipping into savings to maintain spending.
“The long-awaited housing-market correction is upon us and indications are that it is not going to be quite as orderly as many, including the Fed, are predicting,” said economists Sheryl King and Claudia Lokody in an Aug. 25 report to clients. The slump in housing “has the potential to pull consumer spending to the brink in early 2007.”
A drop in home prices would prevent consumers from tapping into home equity as a source of extra spending money, King and Lokody said. The slump in construction will also ripple through other areas of the economy, dragging down employment, they said.