The Deloitte Leading Index of Consumer Spending fell to a new low this month, driven by sharply higher inflation in November, combined with continued falling home prices.

"Increases in energy and food prices are reducing consumer purchasing power," says Carl Steidtmann, chief economist with Deloitte Research and author of the monthly index. "Sharply higher inflation caused real wage growth to fall to close to 0 percent this month and, combined with continued falling home prices, caused the consumer index to drop sharply. Higher inflation and unemployment are key risks for consumer spending capacity in the months ahead, and we continue to expect uncertainty in the early months of 2008."

The index, comprising four components—tax burden, initial unemployment claims, real wages and real home prices—fell to 2.30 percent, from a revised gain of 2.61 percent a month ago.

"January sales will be significantly affected by gift card redemptions and fresh winter merchandise, and will be critical to retailers," says Stacy Janiak, Deloitte’s U.S. Retail Leader. "Moving forward, as the economy puts more pressure on consumer spending, retailers should continue to focus on headcount and inventory control, while pursuing price optimization to maximize revenues and profits. In addition, presenting a clear vision of value differentiators becomes even more critical to capturing share of consumers' wallets."

Highlights of the index, which tracks consumer cash flow as an indicator of future consumer spending, include:

• Tax Burden: The tax burden remained unchanged in November. The tax burden grew more slowly in 2007; this should increase disposable incomes and sustain higher consumption growth, and have a positive impact on the consumer index for at least the next 12 months.
• Initial Unemployment Claims: Growth in unemployment claims is higher than last year; however, the unemployment rate remained steady at 4.7 percent in November compared to October, with job losses reported in manufacturing, construction, credit intermediation and real estate. This partly reflects the robust performance of the economy in the third quarter, when GDP grew at annual rate of 4.9 percent, which helped avoid job losses across the board in spite of the weak housing market and the credit crunch. Increasing unemployment is a key risk to consumption spending if the economy slows down in the coming months.
• Real Wages: Growth in real wages was close to zero in November. This reflects the sharp rise in inflation in November when the CPI increased by 0.8 percent compared to the previous month, driven by higher energy inflation. Inflation remains a key risk factor for consumer spending.
• Real Home Prices: The housing market is showing no signs of improvement, with real home prices falling by record levels in November and new home sales falling by nine percent. Even though there was a marginal increase in existing homes sales during the month, the inventory build-up will last another 10.3 months at the current sales pace.

For more information about Deloitte’s Retail group, visit www.deloitte.com/us/retail.

About Deloitte
As used in this document, "Deloitte" means Deloitte & Touche USA LLP.