Paycheck Pressure

by Shella Deni, Elizabeth Flech - AP

As the U.S. economy slows, wages can't keep up with inflation, which means less spending power for already troubled consumers. According to the Bureau of Labor Statistics, inflation-adjusted weekly wages in the past four months fell for about 80 percent of workers in non-managerial production and services jobs.

From November through January consumer prices, excluding food and energy, rose at an annual rate of 3.1 percent, according to the Labor Department-higher than the Federal Reserve's unofficial comfort zone of 1 percent to 2 percent. Costs for medical care, education, clothing, and airline fares are dropping, while oil, wheat, soybeans and corn futures have been trading near all-time highs. A Tuesday report showed wholesale inflation for goods bought by producers jumped by 1 percent in January, more than double the increase economists were expecting.

The rise in prices is "a sustained hit on consumers' real incomes and, hence, on their ability to spend on other goods and services," writes High Frequency Economics chief U.S. economist Ian Shepherdson.

For the Federal Reserve, concerns about the sluggish health of the economy have overtaken worries about soaring prices. The central bank cut interest rates five times in the past five months. Lower interest rates typically contribute to inflation, and the Fed recently raised its inflation expectations for the year. Economists anticipate another rate cut at the bank's March 18 meeting.

Consumer spending, which is closely finked to job security and expectations of healthy wage growth, is the single most Important contributor to U.S. gross domestic product and constitutes more than two-thirds of the nation's output, notes National Retail Federation chief economist Rosalind Wells. "Average workers have been faced with erosion in their spending power,· she notes, which is bad for the broader economy and for already struggling retailers.

A Tuesday conference Board Consumer Confidence Index reading dropped to 75 for February, far below a projected reading of 83. Bear Steams economist John Ryding notes the survey indicated a sharp drop in consumers' assessment of labor market conditions in the month. The decline in consumer confidence, including the drop in consumers' assessment of the labor market, has a recession- like feel to it: he writes.