Rise of Gas Price opens Consumers Wallet

By Park Sae-jin Posted : September 29, 2012, 15:05 Updated : September 29, 2012, 15:05
(Photo source/credit: The Faster Times)
Rising prices pushed consumers to spend more in August but their paychecks barely increased.
Personal expenditures climbed 0.5% in August from a month earlier—the biggest increase in six months, the Commerce Department said Friday. But below the headline figure were weak details that cast doubt on the sustainability of consumer spending in the next months.
Last month's jump came against a backdrop of rising prices, led largely by gasoline. The national average retail price of regular gasoline is up about 47 cents a gallon since the start of July, according to the latest government data. Taking price increases into account, spending inched up just 0.1%.
While gas drove consumer spending higher last month, personal income growth inched up just 0.1% in August, the same increase as a month earlier. Wage and salary income, which feed directly into the personal spending that accounts for the lion's share of the nation's economic activity, also increased 0.1%.
                                                                                            
Increased spending and stagnant incomes meant that consumers had less money to save in August—the saving rate dropped to 3.7%, its lowest level since April.
"Income growth isn't strong enough to fuel the current pace of spending so people are having to save less to keep up, and that's not a sustainable long-term path," said Tim Quinlan, an economist at Wells Fargo in Charlotte.
Consumer spending is the largest part of the economy, accounting for about 70% of economic demand. But with paltry job growth and an unemployment rate above 8%, millions of out-of-work Americans are keeping spending curtailed. Many more are employed but aren't seeing their paychecks grow because they have little leverage to demand raises and have scant opportunities to leave for better pay.
"All in all, the weakness of real spending and income adds to the picture evident in recent data that final demand growth in the U.S. has slowed materially in recent months, across household, business and export sectors," said Barclays economist Peter Newland.
Though prices were higher on a month-to-month basis, it isn't likely to get the Federal Reserve concerned about inflation. The central bank launched a new round of bond buying earlier this month amid expectations that inflation will remain subdued. The price index for personal consumption expenditures, the Fed's preferred inflation measure, increased 1.5% year-over-year in August. The Fed targets a level of around 2%. The closely watched core PCE index, which excludes volatile food and energy prices, held steady at 1.6% on a year-over-year basis in August.
Despite higher prices and slow income growth, consumers brightened their outlooks in September from the previous month on the hope that job growth will pick up in the coming year. Consumer sentiment, as measured by Thomson Reuters/University of Michigan, was 78.3 in September—down slightly from a preliminary reading earlier this month, but still up from 74.3 in August and well above the 59.5 reading in September 2011. In addition to an improved outlook toward the labor market, consumers' outlook brightened on a better stock market and rising home values.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Content credit: Jeffrey Sparshott/ The Wall Street Journal)

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