Implications: Consumer spending keeps growing at a healthy clip, although inflation is now taking a larger bite. Nominal consumer spending is up 4.8% versus a year ago, but up at an even faster 6.8% annual rate in the past three months. The acceleration in spending corresponds to acceleration in private-sector wages and salaries, which are up 4.1% versus a year ago but at a 5.6% annual rate in the past three months. The negative is that inflation has been accelerating as well. Consumption prices are up a moderate 2.2% versus a year ago, but are up at a 3.6% annual rate in the past six months and a 4.6% annual rate in the past three months. Although "core" consumption inflation (which excludes food and energy) is at a lower level, it is also accelerating, up 1% versus a year ago but up at a 1.9% annual rate in the past three months. Given that commodity prices are off their recent highs, some of the headline inflation will temporarily abate over the next couple of months, but core inflation should continue to worsen. This is an economic problem that calls out for a tighter monetary policy, not the continuation of an overly loose policy. Longer term, "real" (inflation-adjusted) consumer spending should strengthen. Consumer balance sheets are healthier and their financial obligations (monthly payments like mortgages, rent, car loans/leases, as well as other debt service), are the smallest share of disposable income since 1995.
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Posted on Friday, May 27, 2011 @ 1:55 PM
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