Inflation outpaces wages, squeezing consumers

WASHINGTON (AP) — The notion that consumers will help lead the economic rebound received a stark rebuttal Friday: The spending power of American families is being squeezed.

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.

Families’ spending power sank as a result. Slack pay and scarce job growth are slowing consumer spending, along with tight credit and a rising savings rate. That’s hindering the economy’s ability to mount a strong recovery.

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

But to middle-class people such as Angie and Larry Kimbrel of Birmingham, Ala., inflation feels anything but moderate. With three sons, the Kimbrels say they’re just scraping by.

Angie Kimbrel, who works for an insurance underwriter, has gone without raises and bonuses and faces higher health-insurance premiums. Work is slow for her husband, a painter, because of the sagging construction and housing markets.

“I haven’t seen anything getting cheaper,” said Kimbrel, 43. She’s facing rising costs for health insurance and gas, in particular.

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.