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Consumers are squeezed as inflation outpaces wages

Food prices fell 0.5 percent last year, the biggest drop since 1961. However, energy prices shot up 18.2 percent.

Associated Press (2009)

Food prices fell 0.5 percent last year, the biggest drop since 1961. However, energy prices shot up 18.2 percent.

WASHINGTON — The notion that consumers will help lead the economic rebound received a stark rebuttal Friday: The spending power of American families is being squeezed.

Workers' inflation-adjusted weekly wages fell 1.6 percent last year — the sharpest drop since 1990 — even as consumer prices rose modestly.

Slack pay and scarce job growth — along with tight credit and a rising savings rate — are slowing consumer spending. That's hindering the economy's ability to mount a strong recovery.

For some families, the overall inflation rate last year — 2.7 percent — understates their burden. Many are struggling with surging costs for health care and college tuition.

Energy led consumer prices higher last year, offsetting the biggest drop in food costs in nearly half a century, the Labor Department said Friday. Core inflation, which excludes the volatile food and energy sectors, rose 1.8 percent. That's the second-smallest rise in four decades.

While the core inflation rate was within the Federal Reserve's comfort zone, it masked the pain consumers felt in their pocketbooks because of the big jump in energy prices and other key items.

Energy prices for the 12 months ending in December 2009 shot up 18.2 percent, the biggest jump since 1979. Food prices swung in the opposite direction. They fell 0.5 percent last year, the biggest drop since 1961.

Another factor that's limiting core inflation is housing costs. They dropped 0.3 percent for the 12 months ending in December, the sharpest annual decline in records dating to 1968.

Economists expect core inflation to remain tame in 2010, giving the Federal Reserve leeway to keep interest rates at record lows to try to invigorate the economy. Inflation and wages remain low because employers can't or won't raise pay in an economy that has shed 7.2 million jobs since the recession began two years ago. The unemployment rate is 10 percent, and the number of jobless has hit 15.3 million, up from 7.7 million when the recession started at the end of 2007. It's even worse in the Tampa Bay area, where unemployment stands at 12.3 percent.

The 1.6 percent drop in average weekly earnings for nonsupervisory workers was the worst yearly performance since a 2.5 percent fall in 1990. Inflation-adjusted pay has sunk in five of the past seven years, underscoring the pressures that households felt even before the recession.

Over the past 10 years, for example, inflation-adjusted wages grew only about 13 percent — the slowest pace in five decades, according to calculations made by Scott Hoyt of Moody's Economy.com. And that trend is expected to persist as long as the recovery remains weak and the job market tight.

"When people are unemployed and wages are weak, household spending is depressed and businesses don't have any pricing power," said Mark Zandi, chief economist at Moody's Economy.com.

Consumers are squeezed as inflation outpaces wages 01/15/10 [Last modified: Friday, January 15, 2010 9:56pm]
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