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

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

In June, the second biggest rise in prices in nearly 30 years 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 rising gasoline prices had eaten into her budget so drastically that she and her husband have eliminated almost all 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.

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

Consumer spending rose 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 rise in May and a 0.2 percent drop in June, 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 0.8 percent in June. That was the second biggest monthly increase since 1981. In September 2005, the gauge rose 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 economic-stimulus program, which was pumping out $76 billion in payments during May and June as the Bush administration sought to keep the economy from falling into a deep recession.

Lots to deal with

“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.

Consumers may soon be getting one break. Oil prices, already down more than $20 from their highs in early July, dipped briefly below $120 in trading Monday, the first time since May. Over time, that could mean lower gasoline prices.

But even with the recent declines, gasoline is selling nationally for around $3.88 a gallon, up more than $1 from a year ago. Last month, gas prices hit an all-time high of $4.11, according to AAA, the Oil Price Information service and Wright Express.

Given economists estimate that every $1 increase in gasoline is like a $120 billion tax, it’s understandable consumers are feeling stretched.

Stocking up

Ken Sheeley, 54, a nurse anesthetist who lives in Richmond, Va., said his family has become more cost-conscious, stocking up on staples such as spaghetti, flour and sugar at Sam’s Club and Costco instead of buying them at the grocery.

The meager 0.1 percent rise in incomes in June followed a sizable 1.8 percent jump in May. Those results were skewed by how the government accounted for the billions of dollars in rebate checks disbursed during the two months, inflating the May figure and making the June performance look weaker.

The overall economy, as measured by the gross domestic product, grew at a 1.9 percent rate in the April-June quarter, more than double the 0.9 percent increase in the January-March quarter. That improvement reflected in part the stimulus payments, although the effect was softened by a surge in energy costs.

Economists believe the $168 billion stimulus program will continue to lift the economy in the current quarter, but many worry the economy could slow significantly in the final three months of this year and early next year as the impact from the one-time checks wears off.

Brian Bethune, senior U.S. economist at Global Insight, a private forecasting firm, said the GDP could post back-to-back declines in those two quarters, meeting the traditional definition of a recession.

“The rebates are not translating into anywhere near the spending impulse that Congress and the administration had hoped for,” he said. “Under these circumstances, the economy remains in very fragile condition.”

House Speaker Nancy Pelosi says the House will vote on a second stimulus package when it returns in September from its August recess. The Bush administration opposes it in part because it could drive the budget deficit higher.

The administration last week announced the economic slowdown, which has resulted in lower tax revenues than expected, will help push the deficit to an all-time record in dollar terms of $480 billion next year, the first year in office for the next president.

The savings rate, as a percent of after-tax incomes, dropped to 2.5 percent in June after having shot up to 4.9 percent in May. Both months had a savings rate above the 0.3 percent level of March before the stimulus payments began.

David Rosenberg, chief economist at Merrill Lynch, said the rise in the savings rate showed “frugality is now replacing frivolity” as consumers sock away part of their stimulus payments.

The most extensive study so far of the payments showed that the average family spent about 20 percent of its rebate in the first month after receipt.

That’s similar to the spending rate in 2001 when the government was also trying to bolster the economy with a stimulus package. Studies have shown about two-thirds of the 2001 payments were spent within the first six months.

Jonathan Parker, an economist at Northwestern University’s Kellogg School of Management and one of the authors of the 2008 study, said the typical family increased its spending on food, drug products and other daily merchandise by 3.5 percent when the rebates arrived relative to a family in similar circumstances who had not yet received its rebate.

The Treasury Department completed the mass distribution of payments in the week ending July 11, sending out 112 million payments totaling $91.8 billion. Payments will continue in smaller batches to households who file returns in coming months.

In other economic news, the Commerce Department reported factory orders shot up by 1.7 percent in June, the fastest pace in six months, reflecting big increases in petroleum prices and heavy demand for military equipment.

Associated Press business reporters Christopher Leonard in St. Louis and Ellen Simon in New York contributed to this report.