Spending Soars, Inflation Flat

Consumers stepped up their spending in May, while a key gauge of inflation fell to zero, the Commerce Department said Monday.

Personal incomes rose 0.4 percent in May, disposable incomes rose 0.3 percent and personal consumption expenditures rose 0.6 percent. The personal savings rate - disposable incomes minus expenditures - fell to a record low negative 1.2 percent.

Personal savings can be negative if consumers finance current consumption out of wealth or debt.

"The spending is being driven by the growing willingness to cash in some of the huge stock market gains that have built up over the past few years," said Joel Naroff, president of Naroff Economic Advisers.

The Federal Reserve, which meets this week to consider raising interest rates to slow the economy, is concerned that demand is growing so fast that inflation may take hold. Chairman Alan Greenspan hinted two weeks ago that the Fed would strike pre-emptively against inflation by raising rates.

However, inflation is still nowhere to be found. The implicit price deflator for personal consumption expenditures showed no gain in May, the best performance on that inflation indicator since September's drop in the deflator.

"The consumption train has a full head of steam and if the Fed is to slow down the economy, it is going to take more than one little 25 basis point increase in short-term interest rates," Naroff said. The key to slowing spending could be the stock market, he said.

"Since so much spending is dependent on the wealth effect, the FOMC can get slow the economy through a combination of higher rates and lower equity prices, but balancing the two will be very difficult to achieve," Naroff said.

Both the spending and incomes numbers were a little lower than the consensus forecast of a panel of economists surveyed by CBS.MarketWatch. They expected income to rise 0.5 percent and spending to increase 0.7 percent.

The Commerce Department also revised the previous four months' data. Incomes were little changed from the earlier estimates while spending was slightly higher. Incomes increased 0.6 percent in January, 0.4 percent in February, 0.3 percent in March and 0.5 percent in April. Expenditures increased 0.5 percent in January, 0.9 percent in February, 0.6 percent in March and 0.5 percent in April.

Spending in May was boosted by a 2.5 percent increase in purchases of durable goods, a rebound from April's 1.2 percent drop. About two-thirds of the gain was autos. Spending on nondurable goods rose 0.5 percent and spending on services increased 0.2 percent.

Written by Rex Nutting, Washington bureau chief for CBS MarketWatch