Consumer prices up slight 0.1% in March

4/14/2010

WASHINGTON — Consumer prices edged up a modest amount in March with prices outside of food and energy rising at the slowest pace over the past 12 months in six years. Despite the good inflation news, household budgets remained under pressure as hourly earnings fell again.

The Labor Department said Wednesday that consumer prices edged up 0.1 percent last month. Core inflation, which excludes food and energy, was unchanged last month.

The small overall increase was in line with expectations while the flat reading for core prices was better than the 0.1 percent rise economists had expected.

Over the past 12 months, core inflation is up by just 1.1 percent, the best 12-month showing since a similar 1.1 percent rise for the 12 months ending in January 2004. That slow rise in core prices has not been lower in more than four decades.

However, household budgets remain under pressure. The Labor Department said in a separate report that average hourly earnings dipped 0.1 percent in March. After adjusting for the small rise in inflation, earnings were down 0.2 percent for the month.

Over the past year, hourly earnings, after adjusting for inflation, are down 0.6 percent as the lingering effects of the worst recession since the 1930s continue to depress wages.

Economists said the gains in food and energy costs were having a more adverse effect on consumer confidence because of the weak income growth.

“At a time when wages have not risen, people are obviously more sensitive to any kind of price increases,” said Nariman Behravesh, chief economist at IHS Global Insight.

For March, overall food prices, which include restaurant meals, showed a gain of 0.2 percent. Food purchased for the home jumped 0.5 percent last month, the biggest rise in 18 months, reflecting big gains in the cost of fruits and vegetables, reflecting winter freezes which cut production in Florida.

Energy prices were flat last month after having fallen by 0.5 percent in February. Those two months followed big gains in previous months as U.S. prices responded to a rise in world crude oil prices.

Outside of food and energy, housing costs were flat last month while clothing prides fell by 0.4 percent. New care pricdes edged up 0.1 percent and airline fares jumped 0.4 percent.

For all of 2009, inflation rose by 2.7 percent and that followed an even smaller 0.1 percent rise in 2008, which had been the smallest change since prices fell by 0.7 percent in 1954.

But workers saw their inflation-adjusted weekly wages fall by 1.6 percent last year, the sharpest setback since 1990 and wages have been down in five of the past seven years, underscoring the pressures households were feeling even before the recession began in late 2007.

Even with inflation at extremely low levels now, some economists are worried that the current period of exceptionally low inflation could be followed by inflation troubles down the road.

The worry is that the Fed will repeat a mistake many economists believe the central bank made following the 2001 recession when it left interest rates too low for too long, fueling an asset bubble in housing that pushed home prices to record levels only to end with a disastrous crash that pulled the entire economy into a recession.

These economists worry that the threat this time could be even more severe because not only has the Fed pushed its target for overnight bank lending to an all-time low but also nearly tripled the assets on its balance sheet. The boost in the bank's assets was undertaken as part of the Fed's campaign to stabilize the financial system.

If the Fed makes a mistake in not draining those excess reserves from the system or in raising rates in a timely fashion, these economists worry that it could sow the seeds for a new bout of inflation.

To be able to safely guide policy, the Fed will need to depend on accurate readings of inflation and on that score some critics have charged that the government's most prominent inflation gauge, the Consumer Price Index, is flawed because it is not properly tracking housing costs.

But most economists discount that criticism, saying that the low inflation readings in the CPI are showing up in other inflation readings as well.

“There are problems with the CPI like any economic statistic, but overall it is doing a good job of measuring inflation,” said Mark Zandi, chief economist at Moody's Economy.com. “It is pretty clear that inflation is low and slowing.”