Nominal consumer spending increased 0.4% in January 2008 as did personal income, the U.S. Commerce Department announced Friday, in a statement. Each was above what economists surveyed by Bloomberg News have estimated -- a 0.2% increase for each.
However, inflation also rose in January 2008, canceling-out the purchasing power of most of the personal income gains.
Meanwhile, the PCE Deflator, which the U.S. Federal Reserve follows closely as a gauge of inflation, increased 0.4%. During the past 12 months, prices have risen 3.7%, roughly twice the pace of the 1.8% 12-month inflation rate as of August 2007.
Core inflation -- which excludes food and energy prices -- increased 0.3% in January 2008 and is running at a 2.2% rate during the past 12 months. That 2.2% rate is above the U.S. Federal Reserve's 1.5-2% target zone for PCE Deflator core inflation, commonly referred to as the Fed's "comfort zone."
Inflation presents dilemma
Economist Steve Affinito told BloggingStocks Friday the personal income and PCE Deflator reports offer more troubling data for the U.S. Federal Reserve regarding monetary policy.
"Income was up in January but the PCE Deflator stat and the core stat are just killers," Affinito said. "It's evidence of rising inflation, driven by rising oil and commodity prices. Those cost increases are now working well into the American market and they're pushing costs up, across the board. Prices increased in the last 12 months at double the rate they did in the 12 months prior to August 2007, and that's something that's hard for the Fed to ignore."
"The Fed has to cut rates to stimulate economic growth, but if does so it knows the action will likely increase inflation," Affinito added. "We're not totally reverting to the stagflation days of the 1970s, but these numbers are on that path, and the duration of the Fed's monetary policy easing cycling will have to be shortened, as a result."
Further, inflation is frustrating the nation's ability to increase real incomes, Affinito said. "We're getting a decent gain in incomes, but inflation is rising at about the same rate. As a result, purchasing power in real terms is not rising much. It's about flat, which is not what economists want to see."
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Reader Comments (Page 1 of 1)
2-29-2008 @ 6:04PM
CherMoe said...
I don't know whose income they're talking about that ROSE in January, 2008.
My husband hasn't had an increase in income in 3 years. His company has changed hands twice in 12 months. The new company has cut worker hrs. to 30 hrs. per week. No overtime is permitted, and if you end up over the "allowed" amount of hours, you are sent home to use it as "comp time".
3-03-2008 @ 3:36PM
lbucci said...
This is another sad commentary on the state of the economy. Do we need wage freezes a la 1972? We're in another tax bracket creep and the overall inflation rate is far greater than the "average percentage wage increase." When will those who make the most money get it? More people than ever have more month left at the end of their money. If we could all just stop spending, those at the top would scream because they wouldn't get wealthier. Hmmm..... National Strike?