Consumer Spending Surge Tainted By Inflation

| About: Consumer Discretionary (XLY)

The Personal Income and Outlays Report was published Friday for the month of February, and was received as welcome news by the market. It offered news of a jump in consumer spending, and any sign of such a gain for our consumer-driven economy is sure to spur enthusiastic response. Still, I warn investors and economy watchers to temper their enthusiasm, as the day's pill contains poison.

The monthly Personal Income & Outlays Report for February highlighted a 0.8% jump in personal outlays, or Personal Consumption Expenditures (PCE). The spending increase surpassed the prior month's revised gain of 0.4% (hiked from the +0.2% initially reported). Indeed, it was welcomed good news, exceeding the economists' consensus forecast for a 0.6% rise. The strong tally was at the very top of the economists' range in fact, which spanned from 0.2% to 0.8%, according to Bloomberg. However, there is a fly in the ointment.

The gain in consumer spending was juiced, you see, by an unsavory ingredient. The unnatural driver was found in prices, as the PCE Price Index reflected in its 0.3% creep higher. Therefore, Real PCE, adjusted for price changes, rose at a lesser 0.5%. Obviously, the key driver of price rise today is found in petroleum and distillates, due to Iran-related concerns. NYMEX Crude Oil Futures for the nearest-term contract now sit steadily above $100, specifically at $103.57 at the hour of scribbling here on March 30, 2012. A look at the iPath S&P GSCI Crude Oil TR Index ETN (NYSE: OIL) chart for February tells the story. The petroleum price driven security traded 8.9% higher through the month. A similar gain is seen in the Teucrium WTI Crude Oil ETF (NYSE: CRUD).

The Core PCE Price Index, which weeds out food and energy prices, rose just 0.1%, so true inflation concerns were tempered Friday. However, you'll want to read an article we have planned to follow this report, addressing what we expect will be a rise in real inflation.

February's data showed consumer spending increased 4.1% on a year-over-year basis, which matched the January's gain. The yearly data should be smoothed and not vary between months, except for when special factors come to play (like 9/11). The PCE Price Index was up 2.3% on a yearly comparison, which is not very concerning. The Fed will likewise find little to worry about in the Core PCE yearly change, which measured at +1.9% in February. The Federal Reserve is said to favor PCE Price Index as a measure of inflation, and so the data point is worthy of your regular inspection.

February's report showed Personal Income rose 0.2% month-to-month, and was up 3.2% on a yearly comparison. The yearly change was down sharply from January's 3.5% change, though I suspect bonus payments add some noise to the data, though remain worth inspection. Unfortunately, Real Disposable Income, adjusted for price changes, fell by 0.1% in February. The Personal Savings Rate also declined in the month, to 3.7% of disposable income, versus 4.3% in January.

In conclusion, I'm not as enthused by the report as the market seemed to be Friday. A couple hours ahead of the close of trading, the SPDR S&P 500 (NYSE: SPY) was up about a half point, making up ground for what had been a poor week. The Consumer Discretionary Select Sector SPDR (NYSE: XLY) was up a bit more, as should be expected. However, the SPDR S&P Retail (NYSE: XRT) was down fractionally. You should also find value in my recent article detailing other concerns I have about issues developing in the consumer segment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.