Tame inflation masks the pain consumers still feel

McClatchy NewspapersJanuary 7, 2010 

WASHINGTON — While the U.S. economy slogged through its deepest tailspin since the Great Depression and Americans slashed spending last year, food prices kept rising sharply for much of 2009, as they have for years.

That trend, coupled with rebounding energy prices, helps explain why many measures of consumer sentiment remain in the dumps even though numerous economic indicators suggest that the recession is ending.

On the face of it, inflation was tame last year. The Consumer Price Index, the broadest measure of changes in consumer prices, fell at an annualized rate in at least eight months in 2009. That hadn't happened in a single month since 1955, let alone for eight straight months.

Inflation, the rise of prices across the economy, fell on a year-over-year basis every month from March through October. It ticked up again in November, the latest reading from the government, rising 1.8 percent from last year.

Even with the broad drop in prices, however, American consumers feel pinched because they don't buy a lot of what the CPI measures — everything from airfares to hotel rooms — with any frequency.

For example, the price of a television fell 27.9 percent in November compared with 12 months earlier, and 18.8 percent in November 2008 compared with the 12 months before that, but people don't buy TVs very often. They do, however, regularly buy gasoline, pay heating and electric bills, shop for groceries or eat at fast-food chains, and what they spend at the supermarket and the gas station affects what they think about the economy.

"The incomes of families have been falling for many groups because of unemployment and reduced hours of work. Ongoing inflation means that even people with jobs . . . aren't doing so well," said Larry Mishel, the president of the Economic Policy Institute, a liberal policy-research group.

Last year's respite from rising energy prices is giving way. Oil prices are back above $80 a barrel on anticipation that a global economic rebound this year will increase demand, and that's sent gasoline prices to a nationwide average of $2.70 a gallon, according to the AAA motor club. A year ago, gasoline cost almost $1 less, averaging $1.72 a gallon nationwide, the club's daily Fuel Gauge report said Thursday.

The cold snap that's over much of the country is likely to push up home heating costs and produce prices. The deep freeze is drawing down supplies of oil and natural gas, driving up prices, and frost is threatening winter crops from Florida to Texas, which could mean higher prices for orange juice, strawberries and some vegetables.

That comes atop a 10.6 percent rise in food and beverage prices from 2006 to 2008, according to Labor Department statistics, which was offset only partially by a half-percent net drop during the first 11 months of 2009.

In 2008, food prices rose by more than 5 percent on an annualized basis in each of the final nine months, and in 2007, food and beverage prices rose by an annualized 4 percent or more in each of the final seven months of the year.

The increases far outpaced the broader inflation rate of 2.8 percent in 2007 and 3.8 percent in 2008. A full-year inflation number for 2009 will be released later this month.

There are numerous explanations for rising food prices, including speculation in the financial markets, where contracts are bought and sold for future delivery of commodities such as orange juice, wheat, corn, oil — needed to power a farm — and natural gas, which is used to make fertilizer.

Some of the price rise also is thought to be due to companies hiking prices to offset lower sales volumes, and still more depends on what segment of the food sector is being studied.

Prices for fresh fruits and vegetables, fresh meat and milk have dropped as commodity prices fell in lockstep with the economic downturn. Fresh fruit and vegetable prices were down 6.2 percent in November over a year earlier. Fresh whole milk was down 15.8 percent.

However, producers of processed and packaged foods aren't dropping their prices. That's why the price of a bag of chips hasn't fallen even as the price of corn on the cob goes down, and why makers of dry dog and cat food keep raising their prices.

"Packaged food prices didn't back off. . . . The more processed it is, the less it has moved back," said Charles Cerankosky, a financial analyst for Northcoast Research in Cleveland who follows nationally important grocers and food manufacturers.

In normal times, consumers might spend their savings on bottles of wine or better-quality steaks. That's not happening now.

"They're walking in and seeing that beef and produce are cheaper . . . but they're leaving the store with money in their pocket. They're trading down. Many households have no capacity to increase their indebtedness . . . and the job market is pretty lousy," Cerankosky said.

What the CPI doesn't fully capture, he said, is the large amount of substitution that's taking place. Consumers are skipping more costly bottles of, say, brand-name ketchup in favor of cheaper store brands — and the inflation index doesn't account for consumers who're using multiple coupons to stretch their spending, he said.

ON THE WEB

Archived Consumer Price Index reports

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