Consumer Spending Falls Off

January 31, 2008 - Consumer spending slowed in December and inflation continued to rise, the government said Thursday, leaving the Federal Reserve little leeway as it ponders policy decisions in the months ahead.

Spending by consumers, which accounts for more than two-thirds of the nation’s economic growth, rose by an anemic 0.2 percent in December after jumping 1 percent in November. Adjusted for inflation, spending was flat for the month.

Economists have predicted a significant downturn in spending as consumers grapple with record-high oil and food prices. The report from the Commerce Department reinforces the disappointing holiday sales figures that leading retail chains released in the last few weeks.

As spending slows, prices continue to rise, a combination that has some economists suggesting the United States could face a period of stagflation. A closely watched gauge of inflation ticked up last month, to a 2.2 percent annual rate; that figure, the core personal consumption expenditures deflator, excludes prices of food and energy.

Over all, prices in December were 3.5 percent higher than they were a year ago, far above the Fed’s so-called “comfort zone” of 1 percent to 2 percent.

High inflation puts the Fed in a difficult situation. The central bank primarily sets monetary policy by changing a key interest rate. Lowering the rate stimulates growth, but also causes prices to rise, creating an increased inflation risk.

In its most recent policy statement, released Wednesday, Fed officials said they expect inflation “to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.”

The Commerce Department report also showed that personal income levels rose 0.5 percent in December. Disposable income — after-tax salary adjusted for inflation — rose 2.1 percent since December 2006.

A separate report from the Labor Department showed that new unemployment claims, a leading indicator of the labor market, increased by 69,000, to 375,000, in the week ended Jan. 26. It was the highest level since October 2005.

Consumer Spending Falls Off
By MICHAEL M. GRYNBAUM | New York Times