Americans earning, spending more

Customers opened their wallets in November, as personal income and prices jumped, according to the Commerce Department. Personal consumption expenditures increased by 1.1%, beating October’s gain of 0.4%. So far, last month’s gain was the highest rate of increase since May 2004, when the index rose by 1.2% Shoppers’ expenses may have been fueled by fatter wallets, as personal income rose by 0.4% in November, rising from the 0.2% gain in October. Prices shot up in response: Exclusive of energy and food, the PCE price index rose 0.2%, the same as in October. This inflationary gauge also jumped to 2.2% year over year, outside of the Federal Reserve’s comfort zone. While recession fears can be put away for November, the sharp rise in prices also raise inflation concerns, said Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla. “This report is saying that spending has outpaced income growth,” Mr. Brown observed. “So many people pay with credit cards now, they don’t see or feel the impact until the bills pile up.” This report suggests stronger than expected economic growth, which will slow in early 2008 as people adjust their spending patterns, he added. A higher core PCE may also make the Fed more reluctant to cut back the federal funds rate early next year. “They don’t want to fuel inflation, but the focus has always been on the credit markets through out this year,” Mr. Brown said. “We can expect a rate cut, but it’s getting tougher for the Fed.”