Consumers feeling pinch
In drag on recovery, low inflation rate still outpaces wages
WASHINGTON – The spending power of families is being squeezed, government data showed Friday, highlighting doubts about consumers’ ability to drive the economic rebound.
Workers saw their inflation-adjusted weekly wages fall 1.6 percent last year – the sharpest drop since 1990 – even as consumer prices rose only modestly. Slack pay and scarce job growth, along with tight credit and a rising savings rate, are holding back spending. That’s hindering the 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, both of which have been galloping far above the overall inflation rate.
Energy led consumer prices higher last year, offsetting the biggest drop in food costs in nearly a half 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.
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’s 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 in at the end of 2007.
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 households felt even before the recession. (Unadjusted for inflation, weekly wages rose 1.9 percent last year.)
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. “That is the reason that inflation is not a problem.”