Inflation is eating US wage gains

Brian Fortinberry, who runs Front Range Barbecue in Colorado Springs, Colo., is feeling the brunt of a spike in prices.

Beef costs about 10 percent more than it did in January, he says. Fruit and lettuce are also pricier. Gasoline has gone up, adding to costs when his restaurant does a catering job. And Colorado voters just raised the minimum wage – pushing up his payroll tab.

"We haven't increased our prices, but we're looking to do that," Mr. Fortinberry says. "Eventually you have to pass it along."

The economy may be a bit cooler than it was a year ago, but inflation is still running hot. It's not like the runaway price train of the '70s, but it's enough so that people notice at the grocery checkout, when they pay for day care, or when they buy college textbooks.

Some prices – namely for housing, food, and medical care – have been more noticeable than others of late, jumping at a 6 percent annual rate during the three-month period from December through February, the government reported Friday. Retail gasoline prices rose 7 percent in just two weeks, according to a March 12 report by the US Energy Information Administration.

Of course, not everything is getting more expensive. The core rate of inflation – prices of all goods and services minus volatile food and energy – has been edging up, not soaring, for the past three months. Still, at a 2.6 percent annual rate, inflation is hotter than Federal Reserve officials would like.

Economists are divided over what happens next. Some say inflation is bound to taper off – though maybe not for some months – as the ripple effects of a housing-market downturn cool the economy. Others say that rising prices will persist and that the economy, instead of cooling off, will run close to its speed limit.

"You're going to see continued [inflationary] pressure," predicts Michael Darda, chief economist at MKM Partners, an investment firm in Greenwich, Conn. "Firms will find the pricing power [to pass along increased costs]. I think it is a broad-based issue."

Doug Stoddard, who works at a computer job in Boston, doesn't need government reports to tell him about rising prices. He's seen them in numerous bills over the past year.

"Rent went up. Cable went up. My gym membership went up," he says.

His subway pass rose from $44 to $59 a month. And he's noticed higher prices for gasoline and groceries.

Mr. Stoddard figures that all this has outstripped the change in his income. Higher health-insurance costs alone ate up most of his last raise, he says.

Wage gains of Fall 2006 dissipate

Millions Americans face a similar touch-and-go battle to keep up with rising prices.

In the past two months, average weekly earnings have fallen in real terms (adjusted for inflation). That marks a reversal from last fall when, thanks to a dip in energy prices, real incomes were enjoying sturdy gains.

Consumers are being buffeted from several directions. The resurgence of inflation comes even as homeowners face a dip in property values and as the stock market has sagged from a recent peak. All this dragged consumer confidence down a notch in an index released Friday by the University of Michigan.

Hopes dim for an interest-rate cut

These economic crosswinds also pose a challenge for Federal Reserve policymakers. At a meeting Tuesday and Wednesday, they will weigh the risks to the economy – whether the threat of inflation is greater than the opposing forces that could cause an economic slowdown.

Many investors have been anticipating that the Fed will cut its short-term interest rate later this spring. That would help ensure that the housing downturn doesn't push the nation into a recession.

To pave the way for such a move, the Fed could first announce a "neutral" policy stance, rather than its current inflation-fighting bias toward raising interest rates.

But the latest news on consumer prices is dimming hopes for both the tonal shift and a subsequent interest-rate cut.

Not everyone has given up on the possibility of some easing by the Fed. But it now looks less imminent.

"The Fed will be on hold for the balance of this year," predicts Carl Tannenbaum, chief economist at LaSalle Bank in Chicago. He says surveys of wholesale and retail prices "are suggesting that inflation is not entirely under control."

In fact, the Labor Department's consumer price index on Friday showed price momentum in a wide range of goods. Food, clothing, shelter, medical care, energy, and airline tickets all posted sizable gains in February.

Some of the recent price changes may represent one-time shocks. Beef prices are reacting, in part, to a devastating storm that buried cattle country in snow. The higher costs for fresh vegetables and fruits such as oranges can be attributed in part to bad weather. Oil and gasoline prices have gone up and down based on forecasts for demand, production quotas set by OPEC nations, and glitches at refineries.

But if the Fed doesn't need to worry about any one price, it does have the task of watching the overall price level. A loose monetary policy can allow a broader cycle of price hikes in the economy, damaging consumer and investor confidence. Such a spiral, once started, can be hard to stop.

The Fed wants "to maintain a healthy investment environment where investors are not seeing their ... returns eaten by rising prices," says Mr. Tannenbaum. That stability helps businesses create jobs and boost productivity, allowing workers' real income to rise.

Some economists say a cooling economy will help to tame inflation. Prices have been falling, in fact, for cars, computer equipment, and other categories that respond to cyclical swings by consumers.

Other analysts are skeptical that the economy is slowing down. Mr. Darda expects both output and inflation to show surprising strength.

"I think we're going to end the year with core inflation much closer to 3 than to 2.5" percent, compared with 12 months before, Darda says. The Fed may not act soon, but "the next move is probably a tightening."

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