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Sat April 9, 2011
Your Money

Paychecks Can't Keep Up With Rising Prices

Anyone who has filled a gas tank or shopped for ground beef recently knows that prices are headed higher.

But while many retail prices may be moving up, workers' wages are remaining flat. The mismatch between rising prices and stagnant wages is putting a squeeze on workers this year.

On one side of the misery equation, Americans have been seeing retail prices rise at an annualized rate of more than a 5.6 percent so far this year, according to the Bureau of Labor Statistics.

Plus, the upward pressure on prices is growing as crude oil prices keep heading higher. U.S. crude oil has been trading at more than $110 a barrel, sending the average price of a gallon of gasoline up to $3.74 a gallon — compared with $2.86 a year ago, according to AAA, the auto club.

Last week, Federal Reserve Chairman Ben Bernanke said he is watching inflation data closely, but still feels this recent surge in prices is "transitory" and should ease soon.

In Europe, however, the central bankers are taking the opposite position. On Thursday, they stopped watching for signs of inflation and took action, raising interest rates to slow economic growth. Their goal is to tamp down consumer demand enough to cool price hikes.

Consumers Feel The Squeeze

No matter what happens with inflation in coming months, Americans are feeling the price pressure right now, especially at the grocery store. Food inflation was tame in 2010, but has taken off in 2011, with big run-ups in prices for beef, milk, vegetables, fruits and butter.

Even as those prices were rising, wages were falling flat. BLS reports show U.S. hourly workers got no pay increase at all in four of the last five months. In March, average weekly earnings amounted to $784.44 — not one penny more than in February.

That lack of wage growth has come at a difficult time for people who drive to work. The typical U.S. driver buys 12 gallons of gas per week. Because of the run-up in prices, filling up weekly now costs roughly $40 a month more than last year. But the average weekly wage is up only $18 from last year. In other words, gas prices alone eat up more than half the average worker's wage increase.

Patrick DeHaan, senior petroleum analyst for a fuel-tracking website called Gasbuddy.com, says the higher gas prices are hurting consumers. "For people who have limited income, gas comes ahead of everything else — even if it means less food on the table," he says. That's because most people have no realistic alternative to driving to work and must purchase gas, he says, no matter what the cost.

By summer, DeHaan expects the national average price of a gallon of gas to be around $4.05.

Shoppers See Harder Times Ahead

Of course, not every price is rising. Home values are still falling, and technology keeps getting cheaper. So, for example, smartphone prices generally are falling.

But most people don't buy a house, or even a phone, very frequently. They do purchase gasoline and milk often, and those high-visibility price increases are creating a negative feeling about the economy. The Conference Board, a business group that conducts a monthly consumer survey, finds that the shoppers' mood is darkening.

"Consumers' inflation expectations rose significantly in March and their income expectations soured," said Lynn Franco, director of the group's Consumer Research Center.

In theory, employers should be able to afford to give workers cost of living raises. In the fourth quarter of last year, corporate earnings — as measured by the S&P 500 Index — were up 31 percent. Analysts expect first-quarter earnings, which are just starting to come out, to show healthy gains again.

Wall Street Is Gaining, But Not Workers

With corporations enjoying big profits, strong productivity gains and higher stock prices, conditions would seem to be good for raises. But employers are still uncertain about the future and wary about hiring. Their reluctance to increase the payroll has created an enormous pool of unemployed, but willing workers. More than 13 million people are seeking jobs. So most employers don't have to offer higher wages to retain existing workers, or attract new ones.

The real problem for workers is that while U.S. companies aren't creating many jobs, employers in developing nations, especially China and India, are hiring. Those foreign employers are creating new consumers, who are pushing up demand for food and oil and other commodities.

So that's the core of the issue: Americans are facing a slack job market, but must shop for the same food and oil and iron that people in other countries want. That creates a painful mismatch — low wage growth with higher commodity prices. Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.

Transcript

LIANE HANSEN, HANSEN:

The price of an education isn't the only thing going up. Anyone who's been to a supermarket or a gas station lately can attest to that. But while it costs more to educate your kids, buy milk for them and keep the gas tank full to take them to school, it's likely your salary has not kept pace. The latest U.S. Labor Department statistics show that average hourly wages have been flat for four of the last five months.

Here to discuss the lack of wage growth is NPR's senior business editor Marilyn Geewax.

Good to see you again, Marilyn.

MARILYN GEEWAX: Hi, Liane.

HANSEN: Marilyn, we haven't seen much inflation in the last few years. Are we seeing it now?

GEEWAX: So far this year, yes. We've seen a lot of inflation. Over the last three months, consumer prices have been rising at a rate of 5.6 percent. Thats an annual rate but it's a lot.

There's a pretty heated debate among economists over whether or not the pace is just a temporary blip or if this is a long-term trend. Last week, Federal Reserve Chairman Ben Bernanke, he said that he thinks this recent surge in prices is, quote, "transitory," and that it'll go away soon.

But in Europe, the central bankers took exactly the opposite position. On Thursday, they raised interest rates in an attempt to slow economic growth in Europe. They want to cool consumer demand enough to hold down the price pressure.

HANSEN: So wages have not kept up with those price hikes?

GEEWAX: It's really remarkable how slow the wage growth has been. Historically, wages and prices move more or less together; workers get cost of living adjustments to keep up with prices. But that just hasn't been happening lately. The Labor Department said that in March, average weekly earnings amounted to $784.44. And, Liane, that was not one single penny more than the previous month. So it makes it pretty tough for people to keep up with their bills.

Let's say that you're the average person and you're trying to fill up your gas tank - that's 12 gallons of gas, thats pretty average. That costs you this year $40 a month more than it was costing last year ago. And this is happening with a lot of things: beef, milk, vegetables, butter, fruit - they're all a lot higher in recent months.

HANSEN: Is everything getting more expensive?

GEEWAX: There really are some things that are cheaper. Home prices are still falling. And, you know, technology just gets cheaper all the time. So smartphone prices are down. But you don't really buy a house or even a phone all that often, but you do buy gasoline and milk all the time. So workers out there are feeling the squeeze of stuck wages and the higher prices.

HANSEN: So whats the problem? I mean can't companies afford to give raises?

GEEWAX: Well, actually corporate profits have been terrific. In the fourth quarter of last year, corporate profits - or at least those that are measured by the S&P 500 Index - they were up 31 percent. And this week, we'll be getting a lot of reports on first quarter earnings and pretty much everybody is expecting them to be healthy too.

So we're seeing corporations enjoying big profits. They have greater productivity. Theyve got higher stock prices. But we still have an awful lot of uncertainty out there and employers are wary, they dont want to hire. And that reluctance to increase the payroll has created this enormous pool of unemployed, but willing workers.

We have more than 13 million people who are seeking jobs. Most employers don't have to offer higher wages to retain their existing workers or to attract new ones from this giant pool of unemployed people.

And then there's globalization. Right now, there aren't nearly enough jobs being created in the United States. But in places like China and India, they are. They're creating jobs, they're creating consumers, and those people are pushing up the demand for food and fuel and other commodities.

So that's really the core of the problem. We've got slack job grown here in the United States but we're shopping for the same food and fuel and iron that people in other countries want too. So that gives Americans a pretty painful mismatch. We have low wage growth but high commodity prices.

HANSEN: Doesn't sound very encouraging for the average consumer.

GEEWAX: Well, it's not because there aren't any easy fixes for this mismatch. What would help would be a surge in job creation in the United States. That would put upward pressure on our wages. And we also need a big boost in the output of food and energy to relieve these global shortages and get rid of this mismatch.

HANSEN: NPR senior business editor Marilyn Geewax. Thanks, Marilyn

GEEWAX: You're welcome, Liane. Transcript provided by NPR, Copyright National Public Radio.