Inflation rate for '09 doesn't tell whole story

WASHINGTON — The spending power of families is being squeezed, government data showed Friday, highlighting doubts about consumers' ability to drive the economic rebound.

Workers saw their inflation-adjusted weekly wages fall 1.6 percent last year — the sharpest drop since 1990 — even as consumer prices rose only modestly. Slack pay and scarce job growth, along with tight credit and a rising savings rate, are holding back spending. That's hindering the recovery.

For some families, the overall inflation rate last year — 2.7 percent — understates their burden. Many are struggling with rising costs for health care and college tuition, both of which have been rising faster than the overall inflation rate.

Energy led consumer prices higher last year, offsetting the biggest drop in food costs in nearly a half century, the Labor Department said Friday. Core inflation, which excludes the volatile food and energy sectors, rose 1.8 percent. That's the second-smallest rise in four decades.

Economists expect core inflation to remain tame in 2010, giving the Federal Reserve leeway to keep interest rates at record lows to try to invigorate the economy. Inflation and wages remain low because employers can't or won't raise pay in an economy that's shed 7.2 million jobs since the recession began two years ago. The unemployment rate is 10 percent, and the number of jobless has hit 15.3 million, up from 7.7 million when the recession started at the end of 2007.

Even though the Consumer Price Index rose 2.7 percent from December 2008 to December 2009, more than 50 million Social Security recipients got no cost-of-living benefit increase this year. That 's because overall prices fell from July to September 2009 compared with the same months in 2008 — the period the government uses to determine Social Security adjustments.

While the 1.8 percent rise in core inflation was within the Fed's comfort zone, it masked the pain consumers felt in their pocketbooks because of the big jump in energy prices and other key items.

Energy prices for the 12 months ending in December 2009 shot up 18.2 percent. That was the biggest jump since 1979. Energy prices had dropped by 21.3 percent during the same period in 2008.

Food prices swung in the opposite direction. They fell 0.5 percent last year, the biggest drop since 1961.

Another factor that's limiting core inflation is housing costs. They dropped 0.3 percent for the 12 months ending in December. It was the sharpest annual decline on records dating to 1968. A glut of single-family homes on the market and record apartment vacancy rates have weighed down housing prices.

Medical costs rose by 3.4 percent in 2009. That continued a trend in which the costs of hospital visits, doctors and drugs are outpacing overall inflation. College tuition costs jumped by 6 percent in 2009 following a 5.8 percent rise in 2008. Over the past decade, college tuition and fees have gone up 92 percent.

Economists caution that the economy can't sustain a strong recovery until wages and job creation strengthen. Business investment and exports driven by a low dollar will help, though.

David Wyss, an economist at Standard & Poor's in New York, said he expected inflation pressures to remain low through the middle of the decade, given the likelihood of a modest recovery with unemployment falling only slowly.

"You have to get back to full employment before inflation becomes a major problem," Wyss said.