March 19, 2011 in Business

Inflation low, but it hurts

Even moderate price increases leave consumers falling behind
 
Associated Press photo

Judy Bates prepares a meal to eat at home with family and friends after church instead of going out to eat on a Sunday in Dora, Ala.
(Full-size photo)

Starbucks raises prices

 Starbucks Corp. is raising prices it charges retailers for packaged coffee by up to 12 percent to cope with higher costs for beans.

 The world’s largest coffee chain said that it informed grocery customers Friday of the increase for Starbucks and Seattle’s Best Coffee brands. It’s up to the grocers and other retailers to decide if they want to pass along that increase to consumers.

 Starbucks also raised the price it suggests stores charge to $9.99 from $8.99 for a 12-ounce package of Starbucks coffee and to $7.99 from $6.99 for Seattle’s Best.

 Starbucks is one of several coffee companies to raise prices as the cost for unroasted beans has hit record levels.

Associated Press

WASHINGTON – Inflation spooked the nation in the early 1980s. It surged and kept rising until it topped 13 percent.

These days, inflation is much lower. Yet to many Americans, it feels worse now. And for a good reason: Their income has been even flatter than inflation.

Over the 12 months that ended in February, consumer prices increased just 2.1 percent. Yet wages for many people have risen even less – if they’re not actually frozen.

Social Security recipients have gone two straight years with no increase in benefits. Money market rates? You need a magnifying glass to find them.

That’s why even moderate inflation hurts more now. And it’s why if food and gas prices lift inflation even slightly above current rates, consumer spending could weaken and slow the economy.

“It feels far more painful now than in the ’80s,” says Judy Bates, who lives near Birmingham, Ala. “Money in the bank was growing like crazy because interest rates were high. My husband had a union job at a steel company and was getting cost-of-living raises and working overtime galore.”

Bates, 58, makes her living writing and speaking about how people can stretch their dollars. Her husband, 61, is retired. They’ve paid off their mortgage and have no car payments. But they’re facing higher prices for food, gas, utilities, insurance and health care, while fetching measly returns on their savings.

“You want to weep,” Bates says.

Consumer inflation did pick up in February, rising 0.5 percent, because of costlier food and gas. Still, looked at over the past 12 months, price increases have remained low. Problem is, these days any inflation tends to hurt.

Almost everyone is being pinched because nationally, income has stagnated. The median U.S. inflation-adjusted household income – wages and investment income – fell to $49,777 in 2009, the most recent year for which figures are available, the Census Bureau says. That was 0.7 percent less than in 2008.

Incomes probably dipped last year to $49,650, estimates Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego and a board member of the National Association for Business Economics. That would mark a 0.3 percent drop from 2009. And incomes are likely to fall again this year – to $49,300, she says.

Significant pay raises are rare during periods of high unemployment because workers have little bargaining power to demand them.

They surely aren’t making it up at the bank. Last year, the average nationwide rate on a six-month CD was 0.44 percent. The rate on a money market account was even lower: 0.21 percent.

Falling behind inflation is something many people hadn’t experienced much in their working careers until now. In the 1990s and 2000s, for instance, most Americans kept ahead of rising prices. Inflation averaged under 3 percent.

And inflation-adjusted incomes rose steadily from 1994 to 1999. Once the 2001 recession hit, incomes did falter. But after that, they resumed their growth, rising each year until the most recent recession hit in December 2007.

These days, Americans face the certainty of higher prices ahead.

Nike Inc., facing higher costs for materials, freight and other things, said Thursday it plans to raise prices on a range of products starting this spring. The company makes athletic shoes and clothing.

Whirlpool, Kraft, McDonald’s, Clorox, Kellogg, and clothing companies such as Wrangler jeans maker VF Corp., and J.C. Penney Co., also say they plan to raise prices. Though higher gasoline and food prices may lift the inflation rate in coming months, the Fed says it doesn’t think inflation will pose a long-term threat to the economy. The central bank projects that inflation won’t exceed 1.7 percent this year.

But if oil prices, now around $101 a barrel, were to go much higher, economists say heavier fuel bills would cause people and consumers to cut back spending on cars, appliances and other items.

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