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US July consumer spending weak, inflation jumps

WASHINGTON - U.S. personal income tumbled unexpectedly in July and inflation-adjusted spending shrank at sharpest rate in four years as the effects of the government stimulus package wore off, a Commerce Department report on Friday showed.

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A big jump in prices pushed inflation to a 17-year high, eroding what little spending power consumers had, in a report suggesting economic momentum spurred by the stimulus is unlikely to last after a sharp pickup in the second quarter.

"With the tax refund effect on spending now more or less over, we think the worst is yet to come for consumers," said Ian Shepherdson, an economist with High Frequency Economics, in Valhalla, New York.

Personal income fell 0.7 percent in the month, the sharpest decline since a 2.3 percent plunge in August 2005 after Hurricane Katrina, the government said. Analysts were expecting July income to stay flat.

Treasury debt prices gained slightly after the report, stock index futures ticked lower, and short-term interest rate futures trimmed chances for Federal Reserve interest rate increases next year on the report.

Consumer spending, which accounts for about two-thirds of national economic activity, rose 0.2 percent, as expected, the slimmest gain since February, after gaining 0.6 percent in June. However, inflation-adjusted spending dropped by 0.4 percent, the sharpest slide in four years.

The government issued $13.7 billion rebate checks in July as part stimulus package aimed at reviving an economy hit hard by a deep housing slump and tight credit.

Inflation, as measured by the year-over-year rise in the personal consumption expenditures index, rose 4.5 percent, the steepest since February 1991, the government said. When volatile food and energy costs were stripped out, the core PCE rose 2.4 percent, the biggest since February 2007.

Core PCE was up 0.3 percent from the previous month, in line with expectations.