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Consumer Spending Up as Inflation Moderates

Expenditures exceed income for a seventh month. The 2005 savings rate is the lowest since the Great Depression.

January 31, 2006|From Reuters

WASHINGTON — U.S. consumer spending shot ahead a strong 0.9% in December as holiday shoppers, enjoying a respite from inflation, tapped savings and assets to make purchases, a government report showed Monday.

The free-spending ways of the American consumer kept the saving rate -- normally the percentage of after-tax income socked away -- in negative territory for a seventh straight month. For all of 2005, the rate was minus 0.5%, the lowest since the Great Depression.

December's negative saving rate came as the surprisingly big spending jump outstripped an as-expected 0.4% rise in personal income, the Commerce Department report showed.

The report, released a day before a Federal Reserve meeting on interest rates, showed inflation better contained than many forecasters had expected.

The department's overall price gauge held steady in December and its core inflation gauge, which strips out food and energy costs, moved up just 0.1%. Wall Street analysts had expected the core measure to rise 0.2%.

Although the department revised its October and November core inflation readings slightly upward, analysts welcomed December's moderation. Over the last 12 months, core prices have risen 1.9% -- just within the Fed's perceived comfort zone.

"That would support the idea that the Fed can stop raising rates soon," said Patrick Fearon, senior economist at A.G. Edwards & Sons in St. Louis.

A separate report showed that manufacturing activity in the Midwest held steady last month. The Chicago Fed said its manufacturing index came in at 112.4 in December, the same as November's upwardly revised reading.

The report on income and spending showed that purchases of cars and other long-lasting manufactured goods climbed 4.8% in December. Shoppers appeared to be getting bargains as prices of these high-cost durable goods fell 0.2%.

"The consumer is still alive and well despite softening of the housing market," said David Powell, an analyst at Ideaglobal in New York.

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