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Consumer Spending Increases at Risk of Rising Commodity Prices

Consumer spending rose a higher than expected 0.7% for the month of February, a 0.3% increase after adjusting for inflation.  This marked the 8th consecutive month of consumer spending increases.  Consumer spending increases are generally indicative of a recovering economy as consumer spending accounts for over 70% of economic growth as measured by Gross Domestic Product (GDP).    More positive news, from a GDP growth perspective, could also be found in reports that showed Personal Income increasing 0.3% last month and the Savings rate falling to 5.8%.

Consumer Spending

blog post 20110328 Chart

 

It is important to note that inflation has now accelerated to its highest rate since June of 2009 according to the Commerce Department.  In our view at Hennion & Walsh, the most recent spending increases were attributable to not only additional purchases but also to rising inflation attributable primarily to higher commodity prices, such as gasoline.

Further, these mounting inflationary pressures could actually put a halt to the trend of increased consumer spending and, in turn, slow down economic growth, in the upcoming months as Americans will use their savings and earned income to likely pay for rising food and energy prices at the expense of other tangible purchases.