Inflation, energy costs pinch workers

Published: Thursday, January 19, 2006 at 6:01 a.m.
Last Modified: Wednesday, January 18, 2006 at 11:11 p.m.
The average American worker got squeezed in 2005 between the biggest jump in energy prices in 15 years and wages that failed to keep up with inflation.
As a result, hourly earnings after adjusting for inflation fell by 0.5 percent in December compared to what workers were earning in December 2004, the Labor Department reported Wednesday.
Workers did see their wages rise last year. It was just that prices rose at a faster pace - 3.4 percent for the 12 months ending in December, the department said.
The 0.5 percent drop in inflation-adjusted hourly earnings last year followed a 0.7 percent fall in 2004 for the 80 percent of the U.S. work force that is employed by the private sector in non-supervisory jobs.
The main culprit in last year's jump in inflation was a 17.1 percent surge in energy prices, the biggest advance since 1990, as gasoline prices topped $3 per gallon for a time. The rise in energy accounted for 40 percent of the overall rise in prices last year.
At the White House, presidential spokesman Scott McClellan said energy prices were still too high and the president was committed to addressing that problem.
But Democrats pointed to the drop in inflation-adjusted earnings as further evidence that the typical American family is not fairing well in the current economic expansion.
"Paychecks are being stretched thinner as families face higher prices for home heating, health care and education," said Sen. Jack Reed, D-R.I.
Jared Bernstein, an economist with the Economic Policy Institute, a liberal Washington think tank, said the problem has been that labor markets have not been tight enough to push employers to boost salaries while inflation has been gradually creeping higher.
Other analysts said the wage weakness was having an impact on consumer confidence.
"People see energy prices going up and they get a little worried about what they can afford to spend money on," said David Wyss, chief economist at Standard & Poor's in New York.
There has been hope that overall inflation will slow to around 2.5 percent in 2006. But that is based on a belief that after two years of big increases, energy prices will calm down, something that has not yet occurred.
Earlier this week, crude oil prices surged to 3-month highs, reflecting worries about a standoff with Iran over its nuclear program and supply disruptions due to violence in Nigeria. Oil prices did decline slightly on Wednesday, falling below $66 per barrel.
On Wall Street, the Dow Jones industrial average fell by 41.46 points to close at 10,854.86 Wednesday as disappointing earnings in the high-tech sector set off a second day of selling.
Overall prices actually declined by 0.1 percent in December, an unexpectedly good performance, following an even bigger 0.6 percent drop in November.
That represented the first consecutive monthly declines in two years, but both months were heavily influenced by declines in gasoline and other fuels that are expected to be reversed in January.
The 3.4 percent rise in overall inflation for the 12 months ending in December was slightly higher than a 3.3 percent increase in 2004 and was the biggest advance since a similar 3.4 percent rise in 2000.
The 17.1 percent jump in energy costs represented the biggest rise in this category since an 18.1 percent surge in 1990 when global oil markets were roiled by Iraq's invasion of Kuwait.
For 2005, gasoline prices were up 16.1 percent. Natural gas prices jumped by 30.2 percent and home heating oil was up 27.2 percent, huge increases that are being felt in higher heating bills this winter.
Outside of the volatile food and energy categories, core consumer inflation rose by just 2.2 percent last year, matching the performance in 2004. Analysts said that global competition was helping to keep the surge in energy from spilling over into more widespread inflation problems.
In its latest look at regional economic conditions, the Federal Reserve reported Wednesday that the economy was expanding at a moderate pace as the new year began with employment, manufacturing and consumer sales all rising while price increases were described as moderate.
Since June 2004, the Fed has been pushed interest rates up 13 times in an effort to make sure that higher energy costs don't become embedded in higher overall inflation as similar oil shocks did in the 1970s.
Economists are predicting that the central bank will make two more quarter-point hikes - at Alan Greenspan's final meeting on Jan. 31 and Ben Bernanke's first meeting as chairman on March 28.

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