April 15, 2011, 8:48 a.m. EDT
U.S. consumer prices climb 0.5% in March
Rising gasoline, grocery costs eat up worker wage increases
By Jeffry Bartash, MarketWatch
WASHINGTON (MarketWatch) — The prices paid by American consumers rose sharply again in March, mainly because of higher gas and grocery costs, according to the latest government data.
The consumer price index rose 0.5% last month, the Labor Department reported Friday. The so-called core rate rose a lesser 0.1%.
Economists surveyed by MarketWatch had expected CPI, which tracks inflation at the retail level, to rise by 0.5% overall, or by 0.2% on a core basis.
While the overall inflation rate affects what consumers pay for goods and services, economists and investors usually pay more attention to the core rate. It strips out the often-volatile food and energy categories and tends to give a better idea of inflationary trends.
Yet the main consumer inflation number has been flashing warning signs for months as food and energy costs, led by gasoline, trek higher.
Consumer prices have climbed 2.7% over the past 12 months, the biggest increase since December 2009. As recently as November the 12-month inflation rate was just 1.1%.
Prices in the 17-nation euro zone also have climbed 2.7% over the past 12 months while China reported a 5.4% jump, separate reports over the last 12 hours have showed, demonstrating the global nature of the rising prices.
Back in the U.S., rising consumer costs have more than offset wage increases and a one-year reduction in the worker payroll tax. The average hourly wage of U.S. workers adjusted for inflation fell by 0.6% in March, according to a separate report from the Labor Department. And real average hourly wages have fallen 1.0% over the past year.
Consumers have less money to spend on variety of disposable goods and services when they have to pay more for basic necessities. Since consumption accounts for two-third of economic growth, the U.S. recovery could falter if Americans cut back on their spending.
Core consumer prices have risen at a much slower pace of 1.2% over the past year, but the 12-month rate has doubled since last October.
The Federal Reserve pays close attention to the core rate when setting interest rates in determining if inflation is under control. More sharp increases in consumer inflation could spur the central bank to raise short-term interest rates for the first time in five years, though most Fed officials believe it won’t be necessary anytime soon.
The soaring price of petroleum, as demonstrated by higher costs of fuel at the gas pump, is behind the bulk of the increase in consumer prices. The energy index climbed 3.5% in March, and it’s soared 23.7% over the past nine months.
The average cost of a gallon of gas nationwide has jumped about 75 cents so far in 2011, including a 20-cent increase in just the last two weeks. As a result, the gas index has risen 14.4% over the last three months.
Food costs rose 0.8% last month as prices increased for a broad range of goods found in the grocery. As a result, the government’s “food at home” index shot up 1.1%, the largest increase in almost three years.
Food costs have risen 2.9% over the last 12 months — the fastest pace since April 2009. The increase has been driven by rising prices of key agricultural crops such as corn and wheat. Higher global demand and major crop failures are largely to blame, economists say.
The only silver lining is that the price of most goods other than food and energy, such as electronics or motor vehicles, have not risen much.
Faced with higher material costs and consumer resistance to price increases, most companies have chosen to reduce expenses or accept smaller profits for the time being.
Yet unless the upward trend in prices is tamed, companies might react by cutting more jobs, putting off hiring or raising prices on consumers — actions that would weaken the U.S. economy.
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