Inflation cut wages in 2005
Pay for 80% of work force failed to keep up with increase in prices
Associated Press
Originally published January 19, 2006
WASHINGTON // The average American worker got squeezed in 2005 between the biggest rise in energy prices in 15 years and wages that failed to keep up with inflation.

As a result, hourly earnings after adjusting for inflation fell by 0.5 percent in December compared with what workers were earning in December 2004, the Labor Department reported yesterday.



Workers did see their wages rise last year. It was just that the Consumer Price Index rose at a faster pace - 3.4 percent for the 12 months ending in December, the department said.

The 0.5 percent drop in inflation-adjusted hourly earnings last year followed a 0.7 percent fall in 2004 for the 80 percent of the U.S. work force that is employed by the private sector in nonsupervisory jobs.

The main culprit in last year's increase in inflation was a 17.1 percent surge in energy prices, the biggest advance since 1990, as gasoline prices topped $3 per gallon for a time.

The rise in energy accounted for 40 percent of the overall rise in prices last year.

At the White House, presidential spokesman Scott McClellan said that energy prices were still too high and that the president was committed to addressing that problem.

But Democrats pointed to the drop in inflation-adjusted earnings as further evidence that the typical American family is not faring well in the current economic expansion.

"Paychecks are being stretched thinner as families face higher prices for home heating, health care and education," said Sen. Jack Reed, a Rhode Island Dem- ocrat.

Jared Bernstein, an economist with the Economic Policy Institute, a liberal Washington think tank, said the problem has been that labor markets have not been tight enough to push employers to boost salaries while inflation has been gradually creeping higher.

Other analysts said the wage weakness was having an impact on consumer confidence.

"People see energy prices going up and they get a little worried about what they can afford to spend money on," said David Wyss, chief economist at Standard & Poor's in New York.

This week, crude oil prices surged to 3 1/2 -month highs, reflecting worries about a standoff with Iran over its nuclear program and supply disruptions due to violence in Nigeria. Oil prices did decline slightly yesterday, falling below $66 per barrel.

Overall prices actually declined 0.1 percent in December, an unexpectedly good performance, after an even bigger 0.6 percent drop in November.

They represented the first consecutive monthly declines in two years, but both months were heavily influenced by a fall in the cost of gasoline and other fuels that is expected to be reversed in January.

The 3.4 percent rise in overall inflation for the 12 months ending in December was slightly higher than a 3.3 percent increase in 2004 and was the biggest advance since a similar 3.4 percent rise in 2000.

The 17.1 percent increase in energy costs represented the biggest rise in this category since an 18.1 percent surge in 1990 when global oil markets were roiled by Iraq's invasion of Kuwait.

For 2005, gasoline prices were up 16.1 percent. Natural gas prices soared 30.2 percent and home heating oil was up 27.2 percent, huge increases that are showing up in higher heating bills this winter.

Outside of the volatile food and energy categories, core consumer inflation rose just 2.2 percent last year, matching the performance in 2004. Analysts said that global competition was helping to keep the surge in energy from spilling over into more widespread inflation problems.

In its latest look at regional economic conditions, the Federal Reserve reported yesterday that the economy was expanding at a moderate pace as the new year began with employment, manufacturing and consumer sales all rising while price increases were described as moderate.

Since June 2004, the Fed has raised a key interest rate 13 times to make sure that higher energy costs don't become embedded in higher overall inflation as similar oil shocks did in the 1970s.

The central bank is likely to make two more quarter-point increases - at Alan Greenspan's final meeting as Federal Reserve chairman Jan. 31 and Ben S. Bernanke's first meeting as his successor March 28.




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