US price increases hit consumers
WASHINGTON – US energy and grocery prices are on the rise, hitting already struggling consumers and posing a tricky dilemma for US policy makers.
Confirming what most US shoppers already suspected, the Labor Department on Thursday reported prices for everything from vegetables to unleaded fuel rose again in January.
The Labor Department’s consumer price index rose 0.4 percent for the month, a rate that was slightly higher than economists expected and which confirmed large price increases for commonly bought goods in the last year.
The figures showed gasoline prices have leaped over 13 percent in the last 12 months, while grocery prices rose slowly but surely by just over two percent.
That trend has experts increasingly worried.
While poor weather, political instability and rising demand from booming countries like China frequently push up the cost of producing everyday goods, until now the US consumer has largely been spared.
“Rising oil prices have been driving gasoline higher for some time, and now we are also seeing rising food costs filter through to the consumer,” according to Nigel Gault, an economist with IHS Global Insight.
Energy commodities and food increases accounted for over two thirds of January’s price increase. During the month food prices increased at the fastest rate since 2008.
That is tough to swallow for Americans who have seen their real earnings fall for the last three months, but it also poses a problem for policy makers, who have dismissed high prices for common consumer goods as an aberration.
Federal Reserve chairman Ben Bernanke has focused instead on low “core inflation”, which strips out volatile food and energy prices, as a sign that demand remains weak, thanks in no small part to high unemployment.
Dismissing inflation hawks, the Fed is pumping $600 billion into the economy and has kept ultra-low interest rates on hold, in an effort to stimulate the economy.
But with rising prices increasingly felt on Main Street, the Fed’s detractors are becoming more vocal. Critics say that both low rates and stimulus spending are stoking inflation just as the economy recovers.
“The January… figures point to what I believe is the beginning of a substantial uptrend in core inflation,” said Stephen Stanley of Pierpont Securities.
While most economists believe unemployment is still too high and wages too low to result in dangerous levels of inflation, rising consumer prices could hurt the economy in other ways.
“An inflationary spiral can only take root if wage inflation accelerates, which we don’t expect,” said Gault. “Instead, rising price rises are squeezing consumer pocketbooks and will restrain the growth in consumer spending volumes.”
That could leave the Fed facing a tough choice between maintaining or cutting stimulus, both of which could hurt consumer demand and with it a key pillar of the economy.