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Spending Rises, Along With Consumer Prices

Modest wage gains, rebate checks power consumer buying

August 4, 2008

The government said the increase in prices was the most since February 1981.

While consumers are dealing with higher prices and the need to spend more, their incomes lagged in June, rising just 0.1 percent. However, incomes were up a much healthier 1.8 percent in May.

"The treadmill is going faster than the legs, at least when it comes to consumers and their spending," said Joel Naroff, chief economist for Commerce Bancorp. "Household consumption surged in June but much of that went to purchase higher priced food and energy. As we already knew, durable goods demand, especially motor vehicles, cratered. There was, however, decent spending on services."

Naroff says he suspects that people are vacationing closer to home this summer and that would increase the service sector numbers. Much of that consumption, he says, was powered by tax rebate checks hitting bank accounts.

On the positive side of the ledger, Naroff says there were some decent gains in wages and salaries, nicely supplemented by the rebate checks. That combination helped keep spending up. "Unfortunately for everyone, prices skyrocketed," Naroff said. "The jump in food and especially energy costs led to the largest monthly price increase in nearly thirty years and the highest yearly increase in seventeen years. Even excluding food and energy, the inflation index rose more than expected."

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