The Saving Rate Increases - And That Ain't Good News

From Reuters, via CNNMoney:

U.S. consumer spending fell an unexpectedly steep 0.5 percent in August, the biggest drop since November 2001, according to a government report Friday that also showed a surprise income decline potentially caused by Hurricane Katrina...

The spending decline pushed up the saving rate, the percentage of disposable income saved, to negative 0.7 percent from July's record low of minus 1.1 percent. A negative saving rate shows U.S. consumers eating into their accumulated wealth to spend.

Admittedly, that's not much of an increase, and it's not clear anyone is expecting it to stick.

Although spending proved weaker than expected in August as auto purchases plummeted, the decline followed two months in which consumers spent freely. Economists said the fall was not particularly troubling.

"The drop in August is just a pullback from that earlier surge in spending," said Gary Thayer, chief economist at A.G. Edwards and Sons in St. Louis.

As to the inflation side of the report:

The fall in spending came as energy prices pushed consumer inflation up 0.5 percent, the largest jump since September 1990, the Commerce Department said.

Outside volatile food and energy costs, inflation as measured by the Federal Reserve's favorite gauge edged up 0.2 percent. Over the past year, so-called core inflation has climbed 2 percent, a tick faster than in the 12 months through July.

That represents a pretty good one-month jump.  Here's the broader picture from the Dallas Fed:

The trimmed-mean PCE inflation rate for August was an annualized 3.1 percent.

According to the BEA, the overall PCE inflation rate for August was 6.1 percent, annualized, while the inflation rate for PCE excluding food and energy was 3.0 percent.

These are fairly volatile series month-to-month...

	Mar. 05	Apr. 05	May 05	June 05	July 05	Aug. 05
PCE	5.0	4.9	0.5	-0.1	3.6	6.1
PCE excluding food & energy	2.2	0.7	2.6	0.4	0.7	3.0
Trimmed mean PCE	2.1	1.7	2.2	1.3	2.3	3.1

... so we shouldn't read too much into one month's number -- the 12-month core inflation rate is still holding steady:

	Mar. 05	Apr. 05	May 05	June 05	July 05	Aug. 05
PCE	2.7	2.9	2.5	2.2	2.5	3.0
PCE excluding food & energy	2.1	2.0	2.0	1.9	1.8	2.0
Trimmed mean PCE	2.3	2.2	2.1	2.1	2.1	2.2

Those facts prompted this, from the CNNMoney report:

Anthony Chan, senior economist at J.P. Morgan Asset Management, said the August core inflation reading was within the Fed's "tolerance" zone.

"I would not view these numbers as overly worrisome," he said. "In the wake of a surge in energy prices, you don't see a lot of it spilling over into the rest of the economy."

Nonetheless, the most recent public comments from Federal Open Market Committee participants do not exactly suggest benign neglect.

From the consumer record elswhere: August retail sales rose In Australia. They did not in Japan, nor in Germany.

UPDATE: Kash is worried about the drop in spending.  Barry Ritholtz documents his signs of decay at The Big Picture.  The Skeptical Speculator is impressed by improvements in manufacturing.  US Housing Bubble notices an AP story on an increase in credit card delinquencies.