US consumers use savings to pay for basics

The rate of consumer's savings has dropped due to higher prices. Consumers are now using more income to buy necessities and therefore unable to save as much money.

By Richard Blackden
US Business Editor
6:36PM BST 28 Mar 2011

Americans' savings rate dropped last month as new figures showed that consumers are using more of their disposable income to cope with the rising cost of food and petrol.

The savings rate declined to 5.8pc in February from 6.1pc in January, as incomes rose a smaller-than-forecast 0.3pc on the month, the Commerce Department said.

In a blitz of data at the start of the week, a separate report showed that consumer spending climbed 0.7pc last month, a better number than forecast, which was welcomed by markets.

Sharp increases in the cost of food and petrol are tempering some of the optimism about a pick-up in growth that many on Wall Street began the year with.

While most economists still expect the world's biggest economy to beat the 2.9pc growth it recorded in 2010, few believe consumers can now match this quarter the performance they put in last quarter when their spending grew at the fastest rate since before the crisis.

"The data provide yet more evidence that higher prices are denting economic growth," said Paul Dales, senior US economist at Capital Economics.

The reports from the Commerce Department showed that once adjusted for inflation, disposable incomes fell 0.1pc in February, their first drop since September.

Food prices had their steepest rise since the 1970s in February, while, at $3.58 per gallon, gasoline is now at a more than two-year high.

The hope is that the spike in gasoline and food prices proves temporary, and that an improving labour market encourages consumers to maintain their spending.

Figures due on Friday are expected to show that companies hired 160,000 new workers in March, adding to evidence that employers are feeling more confident.

With most European governments cutting their spending to bring down their budget deficits this year, experts say an acceleration in US growth has become more important to the global economy.

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