U.S. Economy: Inflation Erodes Buying Power, Tax-Rebate Effects (Bob Willis and Shobhana Chandra)

Aug. 4 (Bloomberg) -- The biggest increase in prices in almost three years eroded consumers' buying power, reinforcing speculation the Federal Reserve won't raise interest rates in the face of faster inflation and slow growth.

Consumer inflation in June climbed 0.8 percent, the most since September 2005, the Commerce Department said today in Washington. Spending increased 0.6 percent, more than forecast, compared with a gain of 0.8 percent the prior month. Price jumps in petroleum and chemicals also swelled the value of orders to American factories in June.

{xtypo_quote_right} "I'd expect more hawkish language from the Fed tomorrow because of where inflation is, but I don't expect a change in the policy rate," said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. "The economy is fairly weak, there are ongoing problems in financial markets and there's not a whole lot of support for consumer spending after the rebate checks are spent.'' {/xtypo_quote_right}

Tax rebates from $168 billion in fiscal stimulus will provide only a temporary boost for Americans facing $4 a gallon gasoline and unemployment at the highest level since 2004. Fed officials, meeting tomorrow, must find a way to acknowledge the risk of accelerating inflation without signaling a rate increase that would worsen the economic slowdown, economists said.

``There is a bit more inflation pressure than many people anticipated,'' said Kevin Logan, a senior market economist at Dresdner Kleinwort in New York, who correctly forecast the gain in spending. "Inflation pressure is more widespread and that has to be some concern for the Fed."

The Fed's preferred gauge of prices, which excludes food and fuel, climbed 0.3 percent, more than economists forecast.

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