By Nell Henderson
Washington Post Staff Writer
Saturday, May 28, 2005; E01

Income and spending in the United States climbed at healthy rates last month, but not much faster than consumer prices, the Commerce Department reported yesterday.

Personal income -- which includes wages, salaries, interest, rents and other sources -- rose 0.7 percent in April, the fastest rate in five months.

But after taxes and inflation, consumers had little more cash in hand; real disposable personal income edged up just 0.1 percent, the report said.

Consumer spending rose 0.6 percent last month, a slowdown from the 0.9 percent increase in March. After adjusting for inflation, such purchases were only 0.2 percent greater in April than the month before.

"Today's report of near stagnant real disposable income and only modest growth in spending for April -- when job growth was solid -- must be seen as disappointing and troubling for the months ahead," wrote Charles W. McMillion, chief economist of MBG Information Services, a financial research firm in Washington.

Personal income and spending made "solid gains" in April, "although the gains were partially eaten away by inflation," Brian Bethune, an economist with Global Insight, wrote in an analysis for clients.

Consumer prices rose 0.4 percent in April, a slight easing from the 0.5 percent increase in March, according to the department's personal consumption expenditure index. Much of those increases reflected surging energy costs; oil and gasoline prices rose rapidly in March and peaked in early April.

"The impact of higher energy prices on real consumer spending growth, while not dramatic, is becoming more apparent," said Peter E. Kretzmer, senior economist with Bank of America Corp.

Energy prices have eased in recent weeks. U.S. benchmark crude oil scheduled for earliest delivery was trading yesterday on the New York Mercantile Exchange around $51 a barrel, down from above $57 a barrel in early April. The national average price for regular gasoline was $2.11 a gallon yesterday, as many motorists were starting their Memorial Day weekend, down from a high of $2.28 a gallon recorded April 11, according to the AAA auto club.

Many economists look at so-called core-inflation measures, which exclude food and energy prices, for a sense of underlying inflation. The core personal consumption expenditure index rose just 0.1 percent last month, down from a 0.3 percent gain in March. It was up just 1.6 percent from April last year, well within the Federal Reserve's comfort zone.

The tame core PCE figure reinforced analysts' expectations that Fed officials will keep raising short-term interest rates very gradually in coming months to keep inflation contained.

Much of the growth in personal income last month reflected a jump in hiring, analysts said.

Wages and salaries rose 0.7 percent in April, the fastest monthly gain this year. But a large share of such income growth has been going to a small share of the workforce, analysts have noted.

Wages and salaries rose 7.6 percent in April from a year earlier -- nearly triple the gain in the average weekly earnings of production and non-supervisory workers, Ray Stone, an economist at Stone & McCarthy Research Associates, said in an analysis yesterday. That category of workers accounts for about 80 percent of the workforce.

Supervisors, therefore, "are enjoying wage gains that outpace production workers," Stone said.

Meanwhile, the savings rate dropped to 0.4 percent in April, which Stone said was effectively a record low; only in September 2001, after accounting for the effects of the terrorist attacks, was the savings rate technically lower.

Economists say many middle- and lower-income workers are making up for sluggish wage growth and low savings by borrowing against their homes, whose values have been boosted in recent years by rapid price appreciation.

"The thesis that home price appreciation provides an offset to the diminished saving rate, is currently playing out in a similar fashion to the appreciation of stocks in the late 1990s," Stone wrote.

Such borrowing would help explain how consumer spending rose 5.8 percent in the first three months of this year from the previous quarter, while real disposable personal income fell 1.2 percent. "Falling real wages, rising prices and interest rates, record low current savings and near record-high debt levels have left households dangerously reliant on spending down home equity and other borrowing," McMillion said.