Inflation pace slows while wages increase

Workers' wages showed bigger gains last year.
WASHINGTON (AP) -- Inflation in 2006 eased to the slowest pace in three years as consumers finally got some relief on energy and medical bills. In further good news, inflation-adjusted wages rose at the fastest clip in nearly a decade.
The Labor Department reported Thursday that the Consumer Price Index climbed by 2.5 percent last year, the best showing since 2003 and nearly a full percentage point lower than the 3.4 percent jump in 2005.
The encouraging news stemmed from a sizable slowdown in energy costs in the second half of last year, after 2 1/2 years when the price of gasoline and other fuels had surged to new highs.
Also helping was a significant moderation in health-care costs. They rose by 3.6 percent, the smallest annual gain since 1998.
Gasoline pump prices jumped again in December, pushing up the CPI by 0.5 percent for the month. But consumers should see further relief ahead on energy: Crude oil is now trading at a 20-month low near 50 per barrel, down the record 77-plus in July.
The slowdown in prices last year occurred as workers' wages, which have lagged in this recovery, began to show bigger gains.
That combination of lower inflation and faster wage growth translated into an increase in inflation-adjusted weekly wages of 2.1 percent for the 80 percent of the work force in nonsupervisory positions.
Followed years of decline
The increase was the biggest gain since 1997 and followed three straight years in which wages, after adjusting for inflation, had fallen even as many businesses posted record profits.
Democrats focused on those wage declines to argue in last fall's congressional elections that President Bush's economic policies were failing the middle class.
Analysts attributed the improvement in real wages in 2006 to a tighter job market that forced businesses to offer higher salaries to attract workers. They predicted further gains.
"Things have finally come together for workers after a long period of tough conditions," said Mark Zandi, chief economist at Moody's Economy.com.
Analysts believe companies will finance the higher wages by trimming profits rather than boosting the price of their products. The latter could fuel inflationary pressures that would raise concerns at the Federal Reserve.
The Fed is expected to keep interest rates on hold until midyear when analysts believe the slowing economy and moderating inflation will give the central bank room to start cutting rates.
On Thursday, the Commerce Department reported that construction of new homes rose by 4.5 percent in December. It was the second straight monthly increase and a signal, according to some analysts, that the worst of the housing slump may be over.