Tame inflation, falling wages signal weak US recovery

WASHINGTON (AFP) – US consumer prices barely rose in December amid a sluggish recovery from recession, official data showed Friday, as falling wages pinched spending that drives most of the world’s largest economy.

The consumer price index rose less than expected in December, by 0.1 percent from November, the Labor Department reported in seasonally adjusted data.

Most analysts had forecast a stronger CPI rise of 0.2 percent.

The so-called “core” CPI, which excludes food and energy prices and is used by the Federal Reserve to forecast future inflation, rose 0.1 percent as expected.

Inflation “was broad-based, with the indexes for food, energy, and all items less food and energy all posting modest increases,” the Labor Department said.

The year ended with the inflation rate at 2.7 percent from a year ago, a sharp increase over 0.1 percent inflation in 2008, the first full year of the worst downturn since the Great Depression.

Inflation stood at 4.1 percent in December 2007 as the economy officially entered recession.

Core 2009 inflation was 1.8 percent, within the Fed’s comfort zone on monetary policy.

“The US is still in the grip of intense disinflationary forces, despite the basis effect lifting the headline year-on-year rate. Deflation risk is real,” said Ian Shepherdson, chief US economist at High Frequency Economics.

“There is no indication that inflation is even a remote danger, and the Fed’s aggressive credit expansion and low interest rate policy have not had the inflationary effects that some critics feared,” said Andres Carbacho-Burgos at Moody’s Economy.com.

Brian Wesbury at First Trust Economic disagreed, saying consumer prices rose 3.3 percent annual rate in the final three months of the year.

“Investors and the Fed need to stop worrying so much about economic growth and start to show more concern about inflation,” he said.

The Labor Department said energy prices surged 18.2 percent in 2009, the sharpest rise since 1979. Gasoline prices leapt 53.5 percent, an all-time record gain in the data series that began in 1937.

The hefty increases came in comparison with rock-bottom levels in December 2008.

Food prices fell 0.5 percent over the year, the steepest decline since 1961.

“The only place where pressures are building greatly is in energy. While demand remains weak, the price of oil has been rising fairly sharply,” said Joel Naroff of Naroff Economic Advisors,

Amid double-digit unemployment and the loss of more than seven million jobs since the recession began, US workers saw their paychecks shrink last year.

Real average weekly earnings were unchanged in December from November, the Labour Department reported separately.

But on a 12-month basis, weekly earnings fell 1.6 percent, the worst pullback since 1990, after rising 3.1 percent in 2008.

The inflation and wages readings came a day after the Commerce Department reported retail sales fell unexpectedly, by 0.3 percent, in December, capping the worst year on record for the spending that drives two-thirds of the country’s economy.

For all of 2009, retail sales plunged 6.2 percent from a year ago, the steepest annual plunge since the data series began in 1992.

The Fed, in its Beige Book report on the economy Wednesday, said that because of the high level of unemployment, wage pressures were “subdued” and overall inflationary pressures modest.

The US economy expanded 2.2 percent in the third quarter of 2009, after four quarters of contraction. The government is set to release its initial estimate of fourth-quarter gross domestic product on January 29.

The Fed and most economists expect data to show continued growth in the fourth quarter and into 2010 but worry that high unemployment — at 10 percent in December — will curb consumer confidence and spending.