LOS ANGELES (CBS/AP) — Wake up and smell the inflation, Los Angeles.
Consumer inflation picked up steam in February, rising 0.5 percent on higher food and gas prices, including such staples as coffee and milk.
That marks a 2.1 percent spike over the last 12 months — a relatively modest pace that may hit consumers already struggling with stagnant wages.
Futures for Arabica coffee beans have more than doubled since the beginning of March, meaning the price of your next Starbucks drip — and even the cheaper store brand coffee — will likely be substantially higher in coming weeks.
Milk prices are also on the rise, but the spike is unlikely to boost revenues for dairy farmers here in California. That’s because most of them have to buy the corn to feed their cows – they don’t grow it themselves.
Many farmers support an Agriculture Department program that would offer insurance to help farmers cover the cost of that corn, but Congress has yet to introduce any legislation on the matter.
Social Security recipients have gone two straight years with no increase in benefits. Money market rates? You need a magnifying glass to find them.
That’s why even moderate inflation hurts more now. And it’s why if food and gas prices lift inflation even slightly above current rates, consumer spending could weaken and slow the economy.
Not that everyone has been squeezed the same. It depends on personal circumstances. Some families with low expenses or generous pay increases have been little affected.
Others who are heavy users of items whose prices have jumped — tuition, medical care, gasoline — have been hurt badly. But almost everyone is being pinched because nationally, income has stagnated.
The median U.S. inflation-adjusted household income — wages and investment income — fell to $49,777 in 2009, the most recent year for which figures are available, the Census Bureau says. That was 0.7 percent less than in 2008.
Incomes probably dipped last year to $49,650, estimates Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego and a board member of the National Association for Business Economics. That would mark a 0.3 percent drop from 2009. And incomes are likely to fall again this year — to $49,300, she says.
Significant pay raises are rare during periods of high unemployment because workers have little bargaining power to demand them.
They surely aren’t making it up at the bank. Last year, the average nationwide rate on a six-month CD was 0.44 percent. The rate on a money market account was even lower: 0.21 percent.
Now go back three decades, a time of galloping inflation, interest rates and bond yields. When Paul Volcker took over the Federal Reserve in 1979, consumer inflation was 13.3 percent, the highest since 1946. To shrink inflation, Volcker raised interest rates to levels not seen since the Civil War.
As interest rates soared, CD and money-market rates did, too. The average rate on money market accounts topped 9 percent. Treasury yields surged, pushing up rates on consumer and business loans. The 10-year Treasury note yielded more than 13 percent; today, it’s 3.5 percent.
By 1984, consumers were enjoying a sweet spot: Lower prices but rising incomes and still-historically high rates on CDs and other savings investments. Consumer inflation had slid to 3.9 percent. Yet you could still get 10.7 percent on a six-month CD.
Even after accounting for inflation, the median income rose 3.1 percent from 1983 to 1984. At the time, workers were demanding — and receiving — higher wages.
More than 20 percent of U.S. workers belonged to a union in 1983. Labor contracts typically provided cost-of-living adjustments tied to inflation. And competition for workers meant those union pay increases helped push up income for non-union workers, too.
Last year, just 12 percent of U.S. workers belonged to unions. And among union members, a majority now work for the government, not private companies. Wages of government workers are under assault as state governments and the federal government seek to cut spending and narrow gaping budget deficits.
Workers’ average weekly wages, adjusted for inflation, fell in February to $351.89. It was the third drop in four months.
The result is that even historically low inflation feels high. So “when you mention low inflation to real people on the street, they immediately roll their eyes,” says Greg McBride, senior financial analyst at Bankrate.com.
Falling behind inflation is something many people hadn’t experienced much in their working careers until now. In the 1990s and 2000s, for instance, most Americans kept ahead of rising prices. Inflation averaged under 3 percent.
And inflation-adjusted incomes rose steadily from 1994 to 1999. Once the 2001 recession hit, incomes did falter. But after that, they resumed their growth, rising each year until the most recent recession hit in December 2007.
Rates on six-month CDs were also much higher than they are now: They averaged 5.4 percent from 1990 to 1999 and 3.3 percent from 2000 to 2009.
These days, though, Americans face the certainty of higher prices ahead.
Whirlpool, Kraft, McDonald’s, Clorox, Kellogg, and clothing companies such as Wrangler jeans maker VF Corp., J.C. Penney Co., and Nike say they plan to raise prices. Whirlpool, which makes Maytag and KitchenAid appliances, says it’s raising prices in response to higher raw material costs.
Kellogg, which makes Frosted Flakes and Pop Tarts, is increasing prices on some products to offset costlier ingredients. Kellogg is responding to soaring costs for commodities including wheat, corn, sugar, cotton, beef and pork.
Vickens Moscova, a self-employed marketer in Elizabeth, N.J., says he’s paying more for staples like cereal, bread, eggs and public transportation. Yet he’s making little from his savings.
“It is a huge pinch,” says Moscova, 25.
Though higher gasoline and food prices may lift the inflation rate in coming months, the Fed says it doesn’t think inflation will pose a long-term threat to the economy. The central bank projects that inflation won’t exceed 1.7 percent this year.
But if oil prices, now around $101 a barrel, were to go much higher, economists say heavier fuel bills would cause people and consumers to cut back spending on cars, appliances and other items.
Another recession would be possible if prices began to approach $150 a barrel. Back in 1983, a barrel of oil cost just $29.40 — or $65 in today’s prices, adjusted for inflation.
All that said, today’s consumers are fortunate that today’s lower rates mean one major household cost remains far lower than in the 1980s: a mortgage.
Thanks, in part, to the Fed’s efforts to push down loan rates starting with the financial crisis, the average rate on a 30 year fixed mortgage is below 5 percent.
The comparable rate in 1981? 18 percent.
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