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Living Costs Rising Fast, and Wages Are Trailin
NY Times
By MICHAEL M. GRYNBAUM
Published: August 14, 2008

The cost of living, led by the soaring cost of gasoline and food, is rising at the fastest rate since the recession of the early 1990s, the government said on Thursday, handing a de facto pay cut to the American worker.

The report, from the Labor Department, offered quantitative proof of what Americans have been feeling for months: almost everything costs more, even as they have less money to pay for it.

Prices of a wide range of common products in the Consumer Price Index were 5.6 percent higher last month than they were in July 2007, the sharpest annual increase since January 1991.

Much of the increase has been driven by the immense run-up in gasoline prices. But food, beverage and transportation costs are also significantly higher than they were a year ago.

The higher prices have made many workers' wages effectively worth less.

In July, rank-and-file workers — those in production or nonsupervisory roles — earned 3.1 percent less than they did a year ago, after adjusting for the rising cost of living.

"Any way you slice it, incomes aren't keeping up with the inflation rate," said Michael T. Darda, chief economist at the trading and research firm MKM Partners.

It was the 10th consecutive month that the weekly average salary had failed to keep pace with inflation, according to statistics from the Labor Department.

Employers are doling out modest wage increases, but not nearly enough to compensate for more expensive food and fuel.

"People see it and they feel it on a daily basis," Mr. Darda said. "If it's gasoline or food, that's visible inflation, and the stuff that households need the most and depend on."

Prices have not risen at the speed they did during the oil crises of the 1970s, and financial policy makers have said they do not expect a repeat of the so-called wage-price spiral that led to double-digit inflation rates during that decade.

But with home values falling and the stock market in a slump, Americans are finding it more and more difficult to pay for basic purchases. Credit card debt has spiraled upward, home foreclosures are rising, and banks have become more guarded in giving out loans and mortgages.

Social Security recipients are now on track to receive the highest cost-of-living increase since 1982.

The Federal Reserve can try to choke off inflation by raising its benchmark interest rate. But such a move would also make it harder for businesses, banks and households to obtain loans, which could cause a further slowdown in the economy. Investors now expect the Fed to hold rates steady until at least the end of the year.

Some economists have argued that as Americans cut back their spending, demand for products and services will drop, forcing businesses to lower their prices.

But inflation is causing pain for businesses, too, as many companies are forced to pay more for fuel and transportation costs for goods. To keep making money, firms may try to pass those costs on to their customers.

Recent weeks have shown a few indications of relief in fuel prices, as oil prices declined steeply. On Thursday, crude oil futures dropped about a dollar to just over $115 a barrel, down 11 percent from a month ago.

Gasoline prices rose 4 percent in July, but that was less than half the 10 percent increase in May. Transportation costs also decelerated. And the dollar has waged a comeback against foreign currencies; on Thursday, it reached a six-month high against the euro.

But while some economists predicted that inflation would start to ease, they said that process could take several months. Many reserved the right to modify their forecasts if the price of oil rebounded.

Over all, the Consumer Price Index, considered the benchmark gauge of domestic inflation, rose 0.8 percent in July. Economists had predicted an increase of half that rate. In June, prices rose 1.1 percent, the second highest monthly pace in 26 years.

The C.P.I. surveys the prices of a basket of common goods and services, from toothpaste and prescription drugs to airline fares and restaurant menus.

Because food and energy prices can be highly volatile from month to month, the Labor Department also calculates a so-called core price index, which strips out those costs. In July, core C.P.I. rose 0.3 percent, reaching a 2.5 percent annual rate.

That is higher than the Fed and other economic policy makers would prefer. Central bankers use core C.P.I. to see whether price increases are becoming entrenched in the broader economy; Fed officials are said to prefer to keep the annual inflation rate at or below 2 percent.

Original Text