Inflation up moderate 2.7 percent in 2009, but consumers squeezed by 1.6 percent wage dip

By Martin Crutsinger, AP Economics Writer , On Friday January 15, 2010, 9:26 am EST

WASHINGTON (AP) — Consumer inflation was tame in 2009, with prices rising 2.7 percent. Yet families felt squeezed as their spending power sank in the face of falling wages, job losses and higher prices for energy, medical care and education.

A surge in energy prices last year offset the biggest drop in food costs in nearly a half century.

The Labor Department said Friday its Consumer Price Index rose a modest 0.1 percent in December. Excluding food and energy, prices were also up just 0.1 percent last month.

A separate department report showed inflation-adjusted weekly wages for the 12 months ending in December fell 1.6 percent — the sharpest decline since 1990. Slack wages and scarce job creation have slowed consumer spending, hindering the economy’s ability to mount a strong recovery.

The 2.7 percent rise in overall consumer prices for 2009 followed a 0.1 percent increase in 2008, which had been the smallest gain in more than a half century.

Energy costs for the 12 months ending in December shot up 18.2 percent. That was the biggest jump since 1979, after they had dropped 21.3 percent in 2008. The energy surge was led by higher gasoline costs, which rose 53.5 percent after falling 43.1 percent in 2008.

Food prices swung in the opposite direction. After rising 5.9 percent in 2008, they fell 0.5 percent for the 12 months ending in December, the biggest drop since 1961.

Core inflation, which excludes the volatile food and energy categories, rose 1.8 percent for the 12 months ending in December. It matched the 1.8 percent rise in core inflation in 2008. Both gains were the smallest since a 1.1 percent rise in 2003.

Core inflation is expected to remain low in 2010 as the country struggles to emerge from the deepest recession since the 1930s. Yet moderate price increases are small comfort for workers whose wages have lagged behind even slight inflation.

The 1.6 percent drop in average weekly earnings for nonsupervisory workers was the worst annual performance since a 2.5 percent decline in 1990. Weekly earnings have fallen in five of the past seven years, underscoring the pressures American households were facing even before the recession began.

The 1.8 percent rise in core inflation for 2009 and 2008 left prices increases within the comfort zone of the Federal Reserve. The scant inflation allows the central bank to keep a key interest rate at a record low to try to invigorate the economy.

Those low rates and huge amounts of stimulus money pumped into the economy by the government would normally raise alarms about inflation. But the sluggish recovery has kept a lid on price increases.

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