Price rises sap joy of tax rebate spending

By Bob Willis  |   2008-8-5  |     NEWSPAPER EDITION

THE biggest increase in prices in almost three decades eroded consumers' buying power in June, diminishing the boost from the government's tax rebates, the United States Commerce Department said yesterday.

Consumer inflation climbed 0.8 percent, the most since February 1981, the Department said in Washington. Spending increased 0.6 percent after a 0.8-percent gain in May.

The tax rebates from the government's stimulus plan would provide only a temporary boost for Americans in the face of US$4-a-gallon (US$1.05-a-liter) gasoline, tumbling home prices and mounting job losses.

Tempting rate

The Federal Reserve is projected to hold interest rates unchanged today as the risks of both faster inflation and slower growth mount.

"The rebates appear to have boosted spending, but the boost starts to fade fairly soon," James O'Sullivan, senior economist at UBS Securities LLC in Connecticut, told Bloomberg News. "Meanwhile, we're left with declining employment, declining home prices and the negative equity wealth effect."

Incomes increased 0.1 percent after jumping 1.8 percent the prior month, the report showed yesterday. The median forecast was a decline of 0.2 percent. About US$28 billion in rebates went out in June, compared with about US$50 billion in late April and May, according to Treasury Department figures.

The Fed's preferred gauge of prices, which excludes food and fuel, climbed 0.3 percent, more than forecast, after a 0.2-percent gain the previous month.

The price measure was up 2.3 percent from June 2007, the biggest year-over-year increase since December.

Investors said they were betting the Fed would hold the benchmark rate unchanged at 2 percent today, according to federal funds futures contracts. Fed Chairman Ben S. Bernanke on July 15 told lawmakers that the economy faced threats to both growth and inflation. Adjusted for inflation, spending decreased 0.2 percent after rising 0.3 percent in May.