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Family incomes fall as prices rise

Published:January 16, 2010, 9:09 AM

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Updated: August 21, 2010, 4:11 AM

WASHINGTON — Families are feeling a squeeze on their spending power, government data showed Friday, highlighting doubts about consumers’ ability to drive the economic rebound.

Inflation-adjusted weekly wages fell 1.6 percent last year — the sharpest drop since 1990 — but consumer prices rose modestly. Slack pay and scarce job growth, along with tight credit and a rising savings rate, are holding back spending, hindering the recovery.

The overall inflation rate last year — 2.7 percent — understates the burden of some families. Many are struggling with surging costs for health care and college tuition. Both 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 — the second- smallest rise in four decades.

But to middle-class people like Angie and Larry Kimbrel of Birmingham, Ala., inflation feels anything but moderate. With three sons, the Kimbrels say they’re just scraping by.

Angie Kimbrel, who works for an insurance underwriter, has gone without raises and bonuses, and faces higher health insurance premiums. Work is slow for her husband, a painter, because of the sagging construction and housing markets.

“I haven’t seen anything getting cheaper,” said Angie Kimbrel, 43. She’s facing rising costs for health insurance and gas, in particular.

Economists expect core inflation to remain tame this year, giving the Federal Reserve leeway to try to invigorate the economy by keeping interest rates at record lows. Inflation and wages remain low because employers can’t or won’t raise pay in an economy that has 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 non-supervisory 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 last 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.”

The last period of strong wage gains occurred in the 1970s, when the country suffered double-digit inflation triggered by oil shocks. Many unions negotiated cost-of-living wage increases. To fight inflation, the Federal Reserve responded by aggressively raising interest rates, conquering inflation but leading to a severe recession in 1981-82.

Even though the Consumer Price Index rose 2.7 percent from December 2008 to December 2009, more than 50 million Social Security recipients got no cost-of-living benefit increase this year. That’s because overall prices fell from July to September last year, compared with the same months in 2008 — the period the government uses to determine Social Security adjustments.

While the 1.8 percent rise in core inflation was within the Fed’s comfort zone, it masked the pain consumers felt in their pocketbooks because of the big jump in energy prices and other key items.

Energy prices for the 12 months ending in December shot up 18.2 percent, the biggest jump since 1979. Energy prices had dropped by 21.3 percent during the same period in 2008. The energy surge was led by higher gasoline costs, which rose 53.5 percent after falling 43.1 percent in 2008.

Food prices swung in the opposite direction. They fell 0.5 percent last year, the biggest drop since 1961.

Housing costs also are limiting core inflation. 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 last year, 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 last year, following a 5.8 percent rise in 2008. Over the past decade, college tuition and fees have soared 92 percent.

Theresa Bryan was in line Friday morning at Dunkin’ Donuts in Haddon Township, N. J., for a cup of coffee — about the only indulgence she allows herself. She says she’s been unable to shop for clothes, shoes or anything for her home for a couple years.

With two children — one in high school, one in college — and a salary as a mortgage processor stalled for the past few years, she has felt no benefit from low inflation.

“I don’t notice anything because I’m so broke,” said Bryan, 50.

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