Rising prices stifle stimulus payments' impact

WASHINGTON — Rising prices, falling home values, stagnant wages and tight credit. It's a potent combination that has struck the American consumer hard.

In June, the second biggest rise in prices in nearly three decades muted the impact of billions of dollars in government stimulus payments, government figures showed Monday.

Incomes barely budged in June and consumer spending retreated after taking into account the higher prices for food, energy and other items, the Commerce Department data show.

It's forcing Americans like Kathy Stanley, of rural Franklin County west of St. Louis, to decide every day what they can and cannot afford, even for staples.

Stanley said Monday that rising gasoline prices had eaten into her budget so drastically that she and her husband have eliminated almost all their discretionary spending.

She said she spent only about one-third what she normally does on her daughter's back-to-school clothes and has even cut back on staple items as food prices have jumped this year.

"I had to cut back on milk," she said. "We just drink more water."

Consumer spending was up 0.8 percent in May and 0.6 percent in June, the Commerce Department said. Those increases were slashed to a modest 0.3 percent increase in May and a drop of 0.2 percent in June, however, when adjusted for rising prices of gasoline, food and other products. Incomes rose just 0.1 percent.

An inflation gauge tied to consumer spending jumped by 0.8 percent in June. That was the second biggest monthly increase since 1981. In September 2005, the gauge rose by 1 percent after Hurricane Katrina shut down Gulf Coast oil facilities and sent energy prices soaring.

Economists said the surge in energy and food prices had dampened the impact of the government's economic stimulus program which was pumping out $76 billion in payments during May and June as Washington sought to keep the economy from falling into a deep recession.

"You've got declining home prices, very tight credit conditions, a soft jobs market and a weak stock market. The consumer has got a lot to deal with," said David Jones, chief economist at DMJ Advisors, a Denver-based consulting firm.

On Wall Street, stocks fell Monday in an erratic session as investors chose to worry about the inflation surge in the consumer spending report rather than the good news that oil prices fell by $3.69 to settle at $121.41 a barrel in New York trading, the lowest level in three months.