June Inflation Drags on Shoppers

Office Depot shoppers Callan Garber, 10, right, and her sister, Lane Barber, 14, left, shops for school supplies at Office Depot in Mountain View, Calif., Tuesday, July 29, 2008. The Commerce Department reported Monday, Aug. 4, 2008, that consumer spending dipped by 0.2 percent in June, after removing the effects of higher prices, the poorest showing since a similar drop in February. (AP Photo/Paul Sakuma)
Office Depot shoppers Callan Garber, 10, right, and her sister, Lane Barber, 14, left, shops for school supplies at Office Depot in Mountain View, Calif., Tuesday, July 29, 2008. The Commerce Department reported Monday, Aug. 4, 2008, that consumer spending dipped by 0.2 percent in June, after removing the effects of higher prices, the poorest showing since a similar drop in February. (AP Photo/Paul Sakuma) (Paul Sakuma - AP)
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By Ylan Q. Mui
Washington Post Staff Writer
Tuesday, August 5, 2008

Consumers' buying power was dragged down by inflation in June, according to data released yesterday by the Commerce Department, dealing another blow to a retail industry already beset by economic woes.

In current dollars, consumers spent 0.6 percent more in June than during the previous month. But after adjusting for inflation, spending dropped 0.2 percent as inflation reached its highest monthly rate since Hurricane Katrina in 2005, signaling that shoppers are paying more to get less. Personal income rose 0.1 percent, but disposable income plummeted 2.6 percent adjusted for inflation as the impact of the economic stimulus checks began to wear off.

"Inflation is still an issue, and certainly the first half of the year was a big burden on consumer spending," said Alan Levenson, chief economist of T. Rowe Price Associates.

The skyrocketing price of oil, which reached a record $147 a barrel in July, pushed gas prices over $4 per gallon and inflated consumer spending. Oil prices have since settled to about $121.41 yesterday, and Levenson said he expects the monthly inflation rate to begin moderating.

The average price of a gallon of regular gas dropped to $3.88 yesterday, down 7.5 cents from a week ago. Such considerations make it unlikely that the Federal Reserve will change interest rates when it meets today, he said.

To help boost spending, the Bush administration mailed economic stimulus checks of up to $600 per person to 130 million households. The payments helped fuel the increase in disposable income in April and May, accounting for about $577 billion in growth, according to the Commerce Department. It also helped buffer the decline in disposable income by $243 billion in June.

Many consumers appear to be holding on to that money, however, according to Brian Bethune, chief U.S. financial economist for Global Insight. With banks tightening their grip on credit, many consumers may be trying to shore up depleted savings accounts.

"Consumers appear to be acting rationally in a very uncertain economic environment," he said.

Those who are spending seem to be reining in their discretionary purchases as necessities such as food and gas eat up larger shares of their wallets. Retail sales rose 0.1 percent in June from the previous month, according to data released by the Commerce Department last month.

Sales at auto dealerships were down 3.6 percent, and furniture stores, electronics retailers and building materials and garden stores were hit particularly hard. Meanwhile, gas stations posted a 4.6 percent gain, and supermarkets and clothing stores also showed growth.

The shift in purchasing patterns has many retailers on edge. Several large national chains have filed for bankruptcy or announced massive store closings over the past year. The latest victim is Boscov's department stores, a family-owned chain with 49 locations that said yesterday it was seeking Chapter 11 bankruptcy protection. It plans to close 10 stores, including one at Marley Station Mall in Glen Burnie.

"I think the industry should be very concerned. Anything that impacts the spending power of consumers clearly impacts our industry," said Scott Krugman, spokesman for the National Retail Federation, a trade group.

Crunch time is nearly here for retailers, which are counting on solid back-to-school spending to help propel them into the crucial holiday season. The NRF estimated that one-fifth of parents had set aside part of their stimulus checks for back-to-school shopping. But that money may be long gone by the time Christmas bells begin to ring.

"The question is: What happens without the safety net of the [tax rebate and stimulus] checks?" Krugman said. "It seems we're about to find out."


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