Consumer Prices Rise Faster Than Wages in July

WASHINGTON – Consumer prices rose faster than most workers’ wages last month as energy costs surged again, the Labor Department reported yesterday.The department’s consumer price index, a widely followed inflation gauge, rose 0.5% in July, the biggest monthly increase since April. That left overall consumer prices 3.2% higher last month than they were a year earlier, the report showed.Wages have lagged by comparison, the department said in a separate report. After adjusting for inflation, average weekly earnings for private production and nonmanagerial employees fell last month by 0.2%. Those wages bought 0.5% less last month than they did in July 2004, after taking price increases into account. These workers make up 80% of the labor force.The American economy has grown at a healthy pace this year and even showed signs of gaining momentum in recent weeks, despite a 14.2% rise in energy prices over the year that ended in July. Consumers have been snapping up autos and bidding up house prices with gusto, while businesses have boosted their spending on equipment and software.But many analysts remain concerned that the expansion may slow sharply if rising energy prices force consumers to cut their spending on other items and cause businesses to pull back on new investments. The rise in the July CPI primarily reflected a 3.8% increase in energy prices, including a 6.1% jump in gasoline prices.The CPI’s increase over the past year represents “a significant dent in real disposable incomes and a threat to consumer spending,” an economist with Capital Economics Limited, Julian Jessop, said. But shoppers found lots of bargains on many items last month, the CPI report showed. Auto dealers heavily discounted new vehicles while retailers slashed prices on clothing. Prices dropped for televisions and audio equipment, personal computers, and telephone services.Those declines nearly offset price increases for many other items, including airfares, medical care, housing, and education. Food costs rose a modest 0.2% last month. As a result, inflation remained subdued in July outside of energy, the CPI report showed. The “core” CPI, which excludes food and energy prices, edged up just 0.1% in July, the same pace as the previous two months, and is up just 2.1% from July of last year.Global and domestic competition have made it difficult for businesses to pass on their energy costs by raising prices on many products. Higher gasoline prices, by cutting into consumer spending power, also may be forcing some businesses to lower prices, a senior economist with Wachovia Economics Group, Mark Vitner, said.“While it seems counterintuitive, higher gasoline prices are actually helping restrain core inflation,” Mr. Vitner wrote in an analysis of the CPI report. “With more money being spent for gasoline, consumers have fewer dollars left for discretionary purchases. The net result is that firms are slashing prices on everything from cars to beer in order to move product.”Federal Reserve officials agree that energy costs are the primary source of inflation. But they also see potential seeds of future inflation in the economy’s brisk rate of growth and the steady improvement of the labor market.The Fed has been raising its benchmark short-term interest rate steadily for more than a year to keep the lid on inflation. Fed officials moved the federal funds rate up to 3.5% last week and indicated they are likely to keep lifting it gradually higher in the months to come.

Consumer Prices Rise Faster Than Wages in July

Consumer Prices Rise Faster Than Wages in July

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