Inflation fears eased by reports on economy

Prices rose 1.6% in Feb.

incomes were up 0.3%

April 01, 2005|By BLOOMBERG NEWS

WASHINGTON - Reports yesterday on consumer spending, incomes and unemployment claims eased concern that the economy is overheating, tempering speculation that the Federal Reserve might accelerate interest-rate increases to thwart inflation.

Personal spending rose 0.5 percent in February, personal income rose 0.3 percent, although wages and salaries increased 0.2 percent, the smallest gain since November, the Commerce Department reported.

The Labor Department reported that the number of Americans seeking first-time unemployment benefits rose in the last weekly tally before today's monthly jobs report.

The spending report showed that inflation stayed within the Fed's predicted range. Prices rose 1.6 percent in the 12 months through February, excluding food and energy costs.

Increases in spending and incomes bolstered the view that the economy is expanding at the "solid pace" the Fed described last week. "These figures tend to support the Fed's measured approach ... and act to calm fears that inflation is accelerating too quickly," said Ian Morris, chief economist at HSBC Securities USA Inc. in New York.

First-time jobless claims unexpectedly rose to 350,000 last week from 330,000 the week before. The gain was the most since the week that ended Jan. 8, although the Labor Department said in its report that last week's figures were skewed by the Easter holiday.

Some economists lowered their predictions ahead of today's monthly payroll report, predicting a median gain of 215,000 jobs in March, down about 4,000 from previous forecasts. The economy added 262,000 jobs in February.

Orders at factories rose less than had been forecast for February, restrained in part by a drop in demand for automobiles and appliances, according to another Commerce Department report yesterday. Orders excluding transportation fell 0.1 percent.

"The economy is good right now; last year it was great," said William D. Zollars, chief executive officer at Yellow Roadway Corp., the biggest U.S. trucker. "It's pretty tough to compare to last year, but things still look pretty solid." Last week, the company raised its forecast for first-quarter earnings as it benefits from a merger, higher freight rates and cost reductions.

U.S. personal spending in February rose for the eighth straight month. The increase followed a 0.1 percent gain in January, the Commerce Department said. The savings rate declined.

"The improving labor market is the principal factor keeping spending afloat," said Richard J. DeKaser, chief economist at National City Corp. in Cleveland, who correctly forecast the rise in spending. "I do expect to see improvement in wages by year-end."

Disposable income, the money left after taxes, increased 0.3 percent in February after a 2.8 percent drop the previous month. Last year, wage growth grew 4.9 percent after rising 2.6 percent in 2003.

Tax refunds might have helped underpin spending. Taxpayers received an average income tax refund of $2,232 this year through March 25, 5.6 percent more than at the same time last year.

Prices of goods and services bought by consumers rose 0.3 percent in February after rising 0.2 percent in January. They were 2.3 percent higher than in February last year. January prices were 2.2 percent higher than in January 2004.

Core prices - minus the cost of food and energy - rose 0.2 percent in February, less than the 0.3 percent gain the Labor Department reported last week.

Consumer purchases rose 0.3 percent after falling 0.1 percent in January when adjusted for changes in prices, the government reported.

Spending on durable goods such as autos, furniture, and other long-lasting items, adjusted for inflation rose 1 percent after declining 4 percent in January.

Purchases of non-durable goods rose 0.2 percent, the Commerce Department reported.

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