Business

Inflation taking toll

Signs of earlier strength now seem ‘false dawn’

WASHINGTON – Real disposable income declined in February as consumer prices jumped by the largest amount in 2  1/2 years, the Commerce Department reported Monday.

Economists said the data show that higher prices for gasoline are starting to take some of the steam out of the economy.

The personal consumption expenditure index, which Federal Reserve officials say is a more accurate gauge of inflation than the better-known consumer price index, increased 0.4 percent on the month, the largest monthly gain since July 2008.

The core rate of inflation, which excludes food and energy prices, rose 0.2 percent for the second straight month, as January’s reading was revised higher.

The last time the core rate rose by more was a 0.3 percent gain in October 2009.

Adjusted for inflation, after-tax incomes fell 0.1 percent in February, the first drop since last September.

Meanwhile, inflation-adjusted consumer spending rose 0.3 percent in February after having remained unchanged in January.

Without strong income gains, “workers are not going to run out and spend,” said Joel Naroff, president of Naroff Economic Advisors Inc., in a recent note to clients.

A slower pace of consumer spending is one reason that economists are cutting estimates for growth in first-quarter gross domestic product. Many see spending rising around a 2 percent annual rate in the first three months of the year, after a strong 4 percent gain in the fourth quarter.

The strong spending seen in the fourth quarter now seems like “another false dawn,” said Paul Dales, senior economist at Capital Economics, in a note to clients.

Real spending on durable goods increased 1.4 percent after rising 0.2 percent in January. Spending on nondurable goods also increased, up 0.4 percent, after falling 0.1 percent in January. Spending on services came in flat for February following a 0.1 percent decline in the previous month.

Personal consumer spending increased 0.7 percent last month, slightly stronger than the 0.6 percent gain expected by economists surveyed by MarketWatch.



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