Consumers Are Squeezed As Inflation Outpaces Wages

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. Another factor that's limiting core inflation is housing costs. They dropped 0.3 percent for the 12 months ending in December. It was the sharpest annual decline on records dating to 1968. A glut of single-family homes on the market and record apartment vacancy rates have weighed down housing prices. Medical costs rose by 3.4 percent in 2009, the biggest advance since a 5.2 percent increase in 2007. That continued a trend in which the costs of hospital visits, doctors and drugs are outpacing overall inflation. College tuition costs jumped by 6 percent in 2009 following a 5.8 percent rise in 2008. Over the past decade, college tuition and fees have soared 92 percent. Being a student at Kalamazoo College, I would say that these effects are being felt everywhere.