Inflation Picks Up, Tempering the Impact of Tax Rebates

MBA (8/5/2008 ) Velz, Orawin
Tax rebates remained a key factor of income and spending data in June. Personal income edged up 0.1 percent after surging 1.8 percent in May. Income growth slowed considerably as the amount of tax rebates reduced. About $28 billion in rebates were distributed in June, compared with about $48 billion in May and $2 billion late April.

Consumer spending ended the second quarter strongly as consumers continued to spend their stimulus tax payments in June. Personal consumption expenditures (PCE) increased 0.6 percent in June, slightly moderating from a 0.8 percent increase in May. Nondurable goods spending led the increase, while durable goods spending declined sharply as auto sales tumbled to the slowest pace since 1993. Adjusted for inflation, consumer spending decreased 0.2 percent in June as a result of soaring prices. Both real durable and nondurable goods spending fell while real spending on services was up a modest 0.2 percent.

For the second quarter as a whole, real PCE grew at an annual rate of 1.5 percent, an improvement from the 0.9 percent increase in the first quarter. While the stimulus payments boosted consumer spending in the second quarter, they were a one-time event. About another $30 billion in rebate checks were sent out in July, so the impact of the tax rebates on spending may not be over, but, going forward, consumer spending growth is likely to show considerable weakness in the absence of tax rebates.

Overall inflation, as measured by the price index tied to PCE, increased 0.8 percent, the biggest increase since September 2005. Headline inflation of 0.8 percent was the largest since 1981 when adjusted for Hurricane Katrina. The index excluding food and energy (or the core PCE)—the Fed’s preferred measure of inflation—rose 0.3 percent. Over the past year, the core PCE rose 2.3 percent, the largest increase since December 2007. The year-over-year increase in the core PCE has been outside the Fed’s comfort zone of 1.0 to 2.0 percent since December 2007.

A separate report showed that rising energy and commodity prices boosted the nominal value of factory orders in June. New orders for manufactured goods advanced 1.7 percent following a 0.6 percent increase in May. The factory orders report included unrevised durable goods orders data released earlier this month and contained new data on nondurable goods manufacturing shipments, inventories and unfilled orders.

Durable goods orders rose 0.8 percent, while nondurable goods orders (shipments) rose 2.5 percent. Most of the increase in nondurable goods shipment was led by petroleum and chemical shipments, which account for about half of the nominal value of total nondurable goods shipments. Excluding these categories, nondurable goods shipments increased 0.5 percent.

Long-term yields increased slightly on the news that core inflation picked up. The yield on 10-year Treasury note stayed around 3.95 percent by Monday afternoon.