Personal Spending and Core Prices Up

Washington, DC, March 1, 2007--Personal spending increased more than forecast in January and the Federal Reserve's preferred price gauge accelerated, suggesting inflation will remain the central bank's biggest concern.

The 0.5 percent rise in spending followed a 0.7 percent December increase, the Commerce Department said. The Fed's preferred measure of inflation rose 0.3 percent, the most in five months.

Gains in consumer spending, which accounts for more than two- thirds of the economy, are key to sustaining the expansion now that housing and manufacturing show few signs of rebounding. Federal Reserve Chairman Ben S. Bernanke yesterday said policy makers expect a pickup in growth later this year.

Incomes in January jumped 1 percent, boosted bonus payments and gains from stock options exercised at the start of the year, the Commerce Department said. The increase followed a 0.5 percent gain in December.

Economists forecast spending would rise 0.4 percent, according to the median of 74 estimates in a Bloomberg News survey. Estimates ranged from gains of 0.2 percent to 0.6 percent.

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 0.3 percent, the most since August, after a 0.1 percent gain the previous month. Some of the increase may have been due to a jump in medical care costs, economists said.

The measure gauging inflation rose 2.3 percent from January 2006, compared with December's 2.2 percent increase. Fed policy makers, including Bernanke, have said they'd be comfortable with increases in a 1 percent to 2 percent range.

The central bank kept the benchmark overnight lending rate at 5.25 percent for a fifth consecutive meeting on Jan. 31 and said ``some inflation risks remain.''

Adjusted for inflation, spending rose 0.3 percent, after a 0.4 percent increase the prior month, the report showed.

Because the increase in spending was smaller than the gain in incomes, the savings rate improved to minus 1.2 percent, from minus 1.4 percent the prior month. A negative rate suggests consumers are tapping savings to maintain spending.

Disposable income, or the money left over after taxes, rose 0.8 percent, after 0.5 percent the previous month. Disposable income was up 4.8 percent from January 2006.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, rose 0.7 percent after increasing 0.8 percent. Purchases of non-durable goods increased 0.1 percent. Spending on services, which account for almost 60 percent of all outlays, rose 0.4 percent.

The economy grew at an annual rate of 2.2 percent in the fourth quarter, extending a string of readings lower than 3 percent to nine months, revised figures from the Commerce Department yesterday showed. Growth has averaged 3.1 percent a quarter over the last decade.