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Inflation Outpaces Spending
NY Times
By CATHERINE RAMPELL
Published: August 5, 2008

Consumers spent more in June, but only because the things they bought cost more.

Driven primarily by energy and food prices, inflation grew 0.8 percent over May, the biggest monthly increase since September 2005, the Bureau of Economic Analysis reported on Monday. Spending, by comparison, grew just 0.6 percent in June.

"Inflation is intensifying, and that is the main source of weakness in consumer spending," said Dean Maki, chief United States economist at Barclays.

High food and energy prices continue to drive overall prices. Without food and energy, core inflation grew at a more modest 0.3 percent over May. The prices of nondurable goods — the most current measure of food and energy prices kept by the bureau, adding in items like clothing — recorded the biggest year-over-year increase since July 1981.

Stock prices fell in response to the news, but recovered some ground before closing lower.

Oil fell $3.69, to $121.41 a barrel, partly on anticipation that struggling consumers would not be buying as much, but also on reports that a developing storm in the Gulf of Mexico would miss offshore oil operations. The Dow Jones industrial average and the broader Standard & Poor's 500-stock index ended the trading day down slightly.

Federal Reserve policy makers will discuss pricing pressures along with the weakness in the economy when they meet Tuesday. They will note that consumer spending managed to outpace inflation in May, largely because of rebate checks from the federal government, before the June report. The government sent out $48.1 billion in tax rebates in May, followed by $27.9 billion in June.

"This is a kind of "Honey, inflation ate my rebate check' story," said Jared Bernstein, a senior economist at the Economic Policy Institute.

Monday's announcement followed a tepid report last week on economic growth. The economy grew at an annual rate of 1.9 percent in the second quarter. The government also revised the gross domestic product for the fourth quarter of 2007 to show a decline.

Other recent indicators, including job losses, have presented a similarly grim picture. Though the numbers in the spending report on Monday were not as dire as Wall Street had forecast, they indicate challenges ahead.

"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."

Democrats in Congress have proposed a second round of stimulus payments, a move the administration has resisted. Now that Congress is in recess, another round of tax rebates seems unlikely to materialize until at least after the election.

The Federal Open Market Committee will discuss how to address inflation concerns and the economic downturn at its regularly scheduled meeting Tuesday. The Fed policy makers are widely expected to leave interest rates unchanged because credit tightening could further crush employment, the housing market and other areas of the ailing economy.

"The Fed is being pulled in a number of different directions," said Nigel Gault, chief United States economist at Global Insight. "If everything else in the economy were going fine, they'd be absolutely raising interest rates. But it's not."

Original Text