Disposable income falls as prices jump, data show

Inflation is now running at its fastest pace since July of 2008 as disposable income falls and prices jumped by the largest amount in 2 1/2 years.

U.S. PCE inflation up 0.4%, most since July 2008; spending up 0.3%

By Greg Robb
MarketWatch

WASHINGTON (MarketWatch) — Real disposable income declined in February as consumer prices jumped by the largest amount in 2 1/2 years, the Commerce Department reported Monday.

Economists said the data show that higher prices for gasoline is starting to take some of the steam out of the economy.

The personal consumption expenditure index, which Federal Reserve officials say is a more accurate gauge of inflation than the better-known consumer price index, increased 0.4% on the month, the largest monthly gain since July 2008. Read “Why spending data should hurt, not help, stocks.”

The core rate of inflation, which excludes food and energy prices, rose 0.2% for the second straight month, as January’s reading was revised higher.

The last time the core rate rose by more was an 0.3% gain in October 2009.

Adjusted for inflation, after-tax incomes fell 0.1% in February, the first drop since last September.

Meanwhile, inflation-adjusted consumer spending rose 0.3% in February after having remained unchanged in January.

Without strong income gains, “workers are not going to run out and spend,” said Joel Naroff, president of Naroff Economic Advisors Inc., in a recent note to clients.

A slower pace of consumer spending is one reason that economists are cutting estimates for growth in first-quarter gross domestic product. Many see spending rising around a 2% annual rate in the first three months of the year, after a strong 4% gain in the fourth quarter.

The strong spending seen in the fourth quarter now seems like “another false dawn,” said Paul Dales, senior economist at Capital Economics, in a note to clients.

Real spending on durable goods increased 1.4% after rising 0.2% in January. Spending on non-durable goods also increased, up 0.4%, after falling 0.1% in January. Spending on services, which has been weak, came in flat for February following a 0.1% decline in the previous month.

Personal consumer spending increased 0.7% last month, slightly stronger than the 0.6% gain expected by economists surveyed by MarketWatch.

The Commerce Department’s data also showed personal income rose 0.3%, decelerating after a 1.2% jump in January. See our comprehensive economic calendar.

Reduced social security contributions, a key measure in the tax pact reached by President Obama and Congressional Republicans at the end of last year, helped spark January’s jump in personal income.

Details

The U.S. savings rate fell to 5.8% in February from 6.1% in the prior month.

On a year-over-year basis, the PCE price index is up 1.6%, the biggest gain since May 2010.

The comparable core rate was up 0.9%, still well below the Fed’s implicit target of just below 2%.

Income from wages and salaries increased 0.3% in February. This is the third straight month of a 0.3% increase.

Income from assets, such as dividends and interest, rose 0.4%.

Income from transfer payments was flat for the second straight month.

Personal taxes increased 0.2% after jumping 4.6% in January.

Greg Robb is a senior reporter for MarketWatch in Washington.

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