February 29, 2008 / 1:33 PM / 10 years ago

Consumer spending up, inflation erodes gain

WASHINGTON (Reuters) - Consumer spending rose more than expected in January, but the gain was eaten up by swiftly rising prices, the government said in a report on Friday that underscored the pressure households face.

The Commerce Department said personal spending rose 0.4 percent last month, while personal income increased by 0.3 percent. Analysts polled by Reuters had forecast both personal income and spending to rise by 0.2 percent.

When adjusted for inflation, however, spending was unchanged, due largely to rising food and energy costs.

“Spending was a little hot, but at the same time the cost of food and energy are skyrocketing so that’s not that surprising. At the same time, it was higher than what people thought,” said Beth Malloy, bond market analyst at Briefing.com in Chicago.

Prices for U.S. government bonds were steady at higher levels after the data. U.S. stocks fell at the open due to some

disappointing corporate earnings that added to investors’ worries about a possible recession.

The personal consumption expenditure price index, a key inflation gauge, rose 0.4 percent in January after an upwardly revised increase of 0.3 percent in December. The index has surged 3.7 percent over the past year, the biggest year-on-year gain since September 2005.

Excluding volatile food and energy costs, the index was up 0.3 percent -- in line with analysts’ expectations and the steepest monthly rise since September.

On a year-over-year basis, this “core” price index rose 2.2 percent, matching the prior month’s gain.

Many officials at the Federal Reserve, which has cut interest rates sharply since mid-September in a bid to combat recession risks, have said they prefer to keep the core price gauge in a 1 percent to 2 percent range.

Higher-than-expected inflation readings at a time when the U.S. economy is struggling under the weight of a deep housing downturn and tight credit conditions have led some economists to warn of the risk of “stagflation” -- a combination of stagnant growth and spiraling prices.

Fed Chairman Ben Bernanke told Congress on Thursday the United States was not heading into a stagflationary period, saying he expected swift-rising commodity prices to at least level out and lead to an easing of price pressures.

The report on consumer spending, showed Americans dug into their savings for a third straight month in January, as the personal savings rate stood at a negative 0.1 percent of disposable personal income.

Reporting by David Lawder, Editing by Kenneth Barry

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