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Inflationary pressures building Original Source Link: (May no longer be active)
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Business
May Consumer Spending Surges, Prices Up
Mon Jun 28, 2004 09:10 AM ET
By Alister Bull
WASHINGTON (Reuters) - U.S. consumer spending jumped last month but inflation accounted for half of the gain, the government said on Monday, worrying the bond market ahead of an expected Federal Reserve interest rate rise this week.
Personal spending was up 1.0 percent in May, the Commerce Department said, beating Wall Street forecasts for a 0.8 percent gain and posting the biggest advance since October 2001's 2.4 percent rise.
April's gain in spending was revised down slightly to 0.2 percent from the originally reported 0.3 percent rise.
U.S. Treasury prices eased on the data and the euro slipped slightly against the dollar as dealers bet the Fed may signal it will raise interest rates faster than expected after the Federal Open Market Committee meeting.
But analysts were less alarmed by the data.
"The numbers show that the U.S. economy is doing very well and inflationary pressures are slowly building," said Peter Frank, senior foreign exchange strategist at ABN Amro.
"The subdued core inflation is consistent with the Fed's measured pace on interest rates," he said.
The Fed is expected to hike interest rates for the first time in 4 years, from their 1958-low of 1 percent, at the end of a two-day gathering which starts on Tuesday.
Fed officials have said they can tighten monetary policy at a measured pace, but also want to assure markets that they will keep U.S. inflation under control.
INFLATION
The latest personal income data showed inflation up last month, with the price index for consumer spending jumping 0.5 percent following a revised 0.2 percent climb in April.
This was revised from a 0.1 percent gain. But the so-called core index, which strips out food and energy costs, also rose 0.2 percent after a 0.2 percent the previous month.
"That (core price change) suggests that there is still very modest inflation which is a good sign for the economy," said Gary Thayer, chief economist at A.G. Edwards & Sons.
"We're still likely to see the Fed raise rates, but at a measured pace -- 25 basis points this week and 25 basis points in either August or September," he said.
The move in prices shifted the year-on-year core inflation reading -- a favorite of Federal Reserve Chairman Alan Greenspan -- to a 1.6 percent gain from an upwardly revised 1.6 percent increase in April.
This had originally been posted at 1.4 percent, indicating that price pressures have built momentum.
Personal income rose 0.6 percent in May, slightly ahead of forecasts for a 0.5 percent rise and matching April's rise.
Economists said job growth was finally boosting U.S. incomes.
"With upward revisions to previous months too, the recovery in employment is dramatically lifting income growth. Gross incomes are now up 5.8 percent year-over-year, but the monthly trend suggests this rate will rise toward 7 percent through the second half," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
© Reuters 2004. All Rights Reserved.
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