Inflation rise slowest in 3 years; wages gain
Published: Friday, January 19, 2007 at 6:01 a.m.
Last Modified: Thursday, January 18, 2007 at 11:11 p.m.
WASHINGTON — Inflation in 2006 eased to the slowest pace in three years as consumers finally got some relief on energy and medical bills. In further good news, inflation-adjusted wages rose at the fastest clip in nearly a decade.
The Labor Department reported Thursday that the Consumer Price Index climbed by 2.5 percent last year, the best showing since 2003 and nearly a full percentage point lower than the 3.4 percent jump in 2005.
The encouraging news stemmed from a sizable slowdown in energy costs in the second half of last year, after 2 years when the price of gasoline and other fuels had surged to new highs.
Also helping was a significant moderation in health care costs. They rose by 3.6 percent, the smallest annual gain since 1998.
Gasoline pump prices jumped again in December, pushing up the CPI by 0.5 percent for the month. But consumers should see further relief ahead on energy: Crude oil is now trading at a 20-month low near $50 per barrel, down from the record $77-plus in July.
The slowdown in prices last year occurred as workers' wages, which have lagged in this recovery, began to show bigger gains.
That combination of lower inflation and faster wage growth translated into an increase in inflation-adjusted weekly wages of 2.1 percent for the 80 percent of the work force in nonsupervisory positions.
The increase was the biggest gain since 1997 and followed three straight years in which wages, after adjusting for inflation, had fallen even as many businesses posted record profits.
Democrats focused on those wage declines to argue in last fall's congressional elections that President Bush's economic policies were failing the middle class.
Analysts attributed the improvement in real wages in 2006 to a tighter job market that forced businesses to offer higher salaries to attract workers. They predicted further gains.
"Things have finally come together for workers after a long period of tough conditions," said Mark Zandi, chief economist at Moody's Economy.com.
Analysts believe companies will finance the higher wages by trimming profits rather than boosting the price of their products. The latter could fuel inflationary pressures that would raise concerns at the Federal Reserve.
The Fed is expected to keep interest rates on hold until midyear when analysts believe the slowing economy and moderating inflation will give the central bank room to start cutting rates.
Hopes of rate cuts before that time have faded, given a string of recent reports showing stronger-than-expected activity in December.
On Thursday, the Commerce Department reported that construction of new homes rose by 4.5 percent in December. It was the second straight monthly increase and a signal, according to some analysts, that the worst of the housing slump may be over.
The CPI report showed that core inflation, which excludes energy and food costs, rose 2.6 percent last year, compared with 2.2 percent gains in both 2004 and 2005. It was highest increase since a 2.7 percent jump in 2001.
Economists, however, said this increase was influenced heavily by a rise in housing costs, reflecting higher demand for rental units as the five-year boom in home sales cooled.
They also noted that core prices have slowed sharply in recent months, rising at an annual rate of just 1.4 percent in the October-December period, just half of the 2.8 percent rise in the late summer. The Fed's comfort zone for core inflation is between 1 percent and 2 percent.
David Wyss, chief economist at Standard & Poor's in New York, predicted that consumer prices would rise by just 1.9 percent this year, reflecting a continued retreat in energy prices.
"We think lower oil prices and a slower economy will keep inflation under control," he said.
For 2006, energy prices slowed to a 2.9 percent increase after soaring by 17.1 percent in 2005 and 16.6 percent in 2004 as global oil markets were roiled by Middle East tensions and heavy demand.
Also helping restrain inflation last year was the sharp slowdown in medical prices, typically one of the fastest growing expense for consumers. For 2006, physician charges rose by just 1.7 percent, the smallest increase in 57 years. Prescription drug prices rose by just 1.9 percent, the smallest gain in 33 years.
Analysts credited the move by Wal-Mart to introduce a $4 generic prescription drug program, which was matched by other big retailers, to helping hold down drug costs.
Hospital costs continued to race ahead, however, rising by 6.1 percent last year, the biggest gain since 2003.
Clothing prices, which had fallen for eight consecutive years, posted a small increase of 0.9 percent in 2006. Airline fares and new car prices were both down for the year.
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