Implications: Watch out above! Consumer spending accelerated into the end of 2010. "Real" (inflation-adjusted) consumer spending increased 0.4% in December and was up at a 4.6% annual rate in the last three months of the year. Why are consumers spending more? First, their incomes are rising. In the past year, real private-sector wages and salaries plus small business incomes are up 3.2%. Second, although consumers are still paying down debt, they're doing so at a slower pace. Notice that this means spending can grow faster than income, not slower. Third, consumers' financial obligations – their debt-related monthly payments plus other recurring charges like rent, car leases, and homeowners' insurance – is now the lowest share of after-tax income since 1995. On the inflation front, consumption prices are up only 1.2% versus a year ago but seem to be accelerating, with prices up at a 2.0% annual rate in the past six months and a 2.4% rate in the past three months. Meanwhile, "core" inflation, which excludes food and energy, remains very subdued, up only 0.7% in the past year. Low core inflation is the excuse the Federal Reserve is using for quantitative easing. We think the Fed needs to focus more on overall inflation, not just the core. So do the Egyptians.
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Posted on Monday, January 31, 2011 @ 10:36 AM
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