Inflation is worse now for Americans
Source: Agencies |
March 23, 2011, Wednesday
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Print Edition
Print Edition
INFLATION spooked America in the early 1980s. It surged and kept rising until it topped 13 percent.
These days, inflation is much lower. Yet to many Americans, it feels worse now. And for a good reason: Their income has been even flatter than inflation.
Back in the '80s, the money people made typically more than made up for high inflation. In 1981, banks would pay nearly 16 percent on a six-month certificates of deposit. And workers typically got pay raises to match their higher living costs.
No more.
Over the 12 months that ended in February, consumer prices rose just 2.1 percent. Yet wages for many people have risen even less - if they're not actually frozen.
Social Security recipients have gone two straight years with no increase in benefits. Money market rates? You need a magnifying glass to find them.
That's why even moderate inflation hurts more now. And it's why if food and gas prices lift inflation even slightly above current rates, consumer spending could weaken and slow the economy.
"It feels far more painful now than in the '80s," said Judy Bates, who lives near Birmingham, Alabama. "Money in the bank was growing like crazy because interest rates were high. My husband had a union job at a steel company and was getting cost-of-living raises and working overtime galore."
Bates, 58, makes her living writing and speaking about how people can stretch their dollars. Her husband, 61, is retired. They've paid off their mortgage and have no car payments. But they're facing higher prices for food, gas, utilities, insurance and health care, while fetching measly returns on their savings.
"You want to weep," Bates said.
Consumer inflation did pick up in February, rising 0.5 percent, because of costlier food and gas. Still, looked at over the past 12 months, price increases have remained low. Problem is, these days any inflation tends to hurt.
Not that everyone has been squeezed the same. It depends on personal circumstances. Some families with low expenses or generous pay rises have been little affected.
Others who are heavy users of items whose prices have jumped - tuition, medical care, gasoline - have been hurt badly. But almost everyone is being pinched because nationally, income has stagnated.
The median United States inflation-adjusted household income - wages and investment income - fell to US$49,777 in 2009, the most recent year for which figures are available, the Census Bureau said. That was 0.7 percent less than in 2008.
Incomes probably dipped last year to US$49,650, estimated Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego and a board member of the National Association for Business Economics. That would mark a 0.3 percent drop from 2009. And incomes are likely to fall again this year - to US$49,300, she said.
Significant pay raises are rare during periods of high unemployment because workers have little bargaining power to demand them.
Now go back three decades, a time of galloping inflation, interest rates and bond yields. When Paul Volcker took over the Federal Reserve in 1979, consumer inflation was 13.3 percent, the highest since 1946. To shrink inflation, Volcker raised interest rates to levels not seen since the US Civil War of 1861-1865.
The average rate on money market accounts topped 9 percent.
These days, inflation is much lower. Yet to many Americans, it feels worse now. And for a good reason: Their income has been even flatter than inflation.
Back in the '80s, the money people made typically more than made up for high inflation. In 1981, banks would pay nearly 16 percent on a six-month certificates of deposit. And workers typically got pay raises to match their higher living costs.
No more.
Over the 12 months that ended in February, consumer prices rose just 2.1 percent. Yet wages for many people have risen even less - if they're not actually frozen.
Social Security recipients have gone two straight years with no increase in benefits. Money market rates? You need a magnifying glass to find them.
That's why even moderate inflation hurts more now. And it's why if food and gas prices lift inflation even slightly above current rates, consumer spending could weaken and slow the economy.
"It feels far more painful now than in the '80s," said Judy Bates, who lives near Birmingham, Alabama. "Money in the bank was growing like crazy because interest rates were high. My husband had a union job at a steel company and was getting cost-of-living raises and working overtime galore."
Bates, 58, makes her living writing and speaking about how people can stretch their dollars. Her husband, 61, is retired. They've paid off their mortgage and have no car payments. But they're facing higher prices for food, gas, utilities, insurance and health care, while fetching measly returns on their savings.
"You want to weep," Bates said.
Consumer inflation did pick up in February, rising 0.5 percent, because of costlier food and gas. Still, looked at over the past 12 months, price increases have remained low. Problem is, these days any inflation tends to hurt.
Not that everyone has been squeezed the same. It depends on personal circumstances. Some families with low expenses or generous pay rises have been little affected.
Others who are heavy users of items whose prices have jumped - tuition, medical care, gasoline - have been hurt badly. But almost everyone is being pinched because nationally, income has stagnated.
The median United States inflation-adjusted household income - wages and investment income - fell to US$49,777 in 2009, the most recent year for which figures are available, the Census Bureau said. That was 0.7 percent less than in 2008.
Incomes probably dipped last year to US$49,650, estimated Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego and a board member of the National Association for Business Economics. That would mark a 0.3 percent drop from 2009. And incomes are likely to fall again this year - to US$49,300, she said.
Significant pay raises are rare during periods of high unemployment because workers have little bargaining power to demand them.
Now go back three decades, a time of galloping inflation, interest rates and bond yields. When Paul Volcker took over the Federal Reserve in 1979, consumer inflation was 13.3 percent, the highest since 1946. To shrink inflation, Volcker raised interest rates to levels not seen since the US Civil War of 1861-1865.
The average rate on money market accounts topped 9 percent.
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