Tags: Household | Costs | Incomes | Inflation

With Household Costs Rising Faster Than Incomes, It’s Hard to Call Inflation ‘Tame’

Saturday, 14 April 2012 08:29 AM

The consumer price index rose 0.3 percent in March, the Labor Department said Friday. Year over year, it rose 2.7 percent. Excluding food and energy, it rose 0.2 percent and year over year 2.3 percent.

If you fill up your gas guzzler or need to feed your faces, inflation is hardly under control. Of course, we have known that for a while.

The real question is what is happening to the broad range of consumer prices and there the trends are just not that great.

The Consumer Price Index rose moderately in March and even excluding the minor necessities such as food and energy, inflation was still up faster than the Fed would like to see. Indeed, the details of the report were not that great as every major category except electricity was up.

Food prices rose but at least the really big increases are largely behind us.

Unfortunately, cupcake costs are soaring, a real blow to my budget that can only be modestly offset by the decline in alcoholic beverages. Medical expenses, clothing and used vehicle prices also jumped.

Whether you look at overall costs or exclude food and energy, the rise since March 2011 is above the Fed’s target levels. Yes, top line inflation has decelerated, but the forward looking core index is accelerating pointing to continued higher than desired inflation rates.

Mr. Bernanke has shifted the focus of attention to the overall index, just at that measure started to fall. Whether that was a coincidence or not, it is the right measure to use.

And the inflation rate of consumer costs is running above the increases in wages and salaries. That is the real issue. As long as spending power is being eroded, and real wages fell again in March, consumption will not be able to rise sharply.

Firms will continue to control labor costs as long as they can and the unemployment rate will have to come down a lot more before we get to the point where a bidding war will come into play.

So to me, this report is not an indication of tame inflation but of an inflation rate that will limit household spending. At the same time, it is not so high that the inflation hawks on the Fed will be able to argue that the FOMC should consider changing its policy.

So Mr. Bernanke has some cover but that is small comfort to all those families who are facing already tight budgets.

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Saturday, 14 April 2012 08:29 AM
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