The inflation squeeze tightens
Prices spiked 4.1 percent last year, the highest increase in 17 years.
Inflation is starting to take its toll on the economy.Skip to next paragraph
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Almost anyone who drives knows it costs more to tank up than a year ago. Add in higher prices at the grocery store or the specialty-food shop, and consumers are beginning to feel the impact on their wallets. Higher food and energy costs are the main reasons that inflation last year was at its highest level in 17 years – a galloping 4.1 percent as measured by the consumer price index.
The rising cost of living is a big reason that holiday sales were disappointing, economists say. Consumers, faced with lower wages and higher prices, are shopping less. Disposable income is shrinking. Last year, wages fell 0.9 percent after adjusting for inflation, says Mr. Brown.
"Real purchasing power is being constrained," he says.
On Wednesday, the extent of this economic squeeze became more apparent when the government reported the December CPI as well as the results for the full year. For December, inflation rose 0.3 percent, down from 0.8 percent in November. But, over the past three months, inflation has grown at a 2.7 percent annual rate.
"These numbers clearly reveal disturbingly high levels of inflation, due mainly to a surge in energy prices in the second half," says Richard DeKaser, chief economist at National City Corp. in Cleveland. "Even removing food and energy, the level is clearly at the high level of the Federal Reserve's comfort zone."
If the inflation trend were to continue, some economists believe it could complicate the Federal Reserve's efforts to stimulate the economy. The Fed tries to balance its role as the nation's chief inflation-fighter with efforts to keep the economy growing.
"The core inflation rate, the rate of inflation without factoring in food and energy, is running at a 2.4 percent annual rate, which is a little bit uncomfortable but not draconian, not a policy stopper," says Bob Brusca of Fact and Opinion Economics in New York.
Because the core rate of inflation has been relatively tame, economists still expect the Fed will lower interest rates by half of a percentage point when it meets at the end of January. "The Fed has indicated it is willing to look the other way, at least for the moment," says Mr. DeKaser. "The Fed has the leisure to go soft on inflation at the moment because it has credibility from its past efforts."