From Labor Research Association

The October jump in the producer price index and the consumer price index signals a new phase in the four-year trends in inflation and real wages. These trends now confirm a downward trend in the living standards for U.S. workers. From October 2003 to October 2004, real average weekly earnings fell by half a percentage point.

Average weekly earnings in the private sector rose by 2.7 percent from October 2003 to October 2004, but after adjustment for inflation, real earnings dropped 0.5 percent. This means that workers' purchasing power has declined dramatically over the past year. A worker earning $400 a week or $20,800 annually in October 2003 now earns $380 a week or $19,760 annually in real dollar terms.

In some industries, workers have been particularly hard hit by lower real wages. In the goods-producing industries, real earnings have declined 0.8 percent over the past year. In the wholesale and retail industries, real earnings have dropped 1.1 percent. Earnings are down by a full percentage point or more in construction, utilities and information services.

Employers pushed wages down dramatically in the wake of the 2001 recession; ongoing soft labor markets have allowed employers to hold wages down since then. Low inflation throughout 2002 and 2003 roughly cancelled out annual pay increases averaging 2 percent to 3 percent. But with inflation now rising at rapid rates, real wages are falling at the fastest pace ever recorded and workers are facing a substantial decline in income.

The producer price index (PPI), which measures inflation in prices for the raw materials and semi-finished goods, jumped 1.7 percent in October. The rise in the PPI stems not only from higher oil prices but also from higher commodity prices across the board. Crude material prices, excluding food and energy, rose 5.4 percent in October.

Increases in the PPI are eventually passed along to consumers. Oil price increases may take up to a year to filter through to consumer prices, so the worst inflation is yet to come. In recent years, intense global competition prevented many producers from increasing their prices at the consumer level. The recent sharp declines in the dollar, however, mean that importers will now have to raise their prices or watch their profit margins collapse. Rising import prices will fuel inflation for U.S. consumers.

Also, U.S. producers have been able to hold their prices down over the past few years because productivity growth was high. But U.S. productivity growth has now fallen to about half of the rate recorded in 2003, so domestic producers will begin to pass more costs on to consumers.

The consumer price index for all urban consumers (CPI-U) rose 0.6 percent in October, 3.2 percent higher than in October 2003. Energy costs, which had declined over the preceding three months after advancing sharply in the first half of the year, increased 4.2 percent in October, accounting for over half of the advance in the overall CPI-U. The index for food, which was unchanged in September, rose 0.6 percent in October.

Price increases for all items less food and energy - the 'core' or underlying rate of inflation - advanced 0.2 percent in October, following a 0.3 percent rise in September. Although the Bush administration likes to cite this 'core' rate and claim that inflation is low, workers do not live in a world of 'core' prices. Instead, they must buy gasoline, heating oil and food. The fact that prices for these items are volatile does not mean that they are irrelevant or can be discounted.

For the first ten months of 2004, the CPI-U rose at an annual rate of 3.9 percent, double the 1.9 percent increase for all of 2003. Energy costs, which increased 6.9 percent in 2003, rose at a 22.5 percent annual rate in the first ten months of 2004.

Food and energy costs are not the only problem workers face. Employers are increasing pushing a larger share of medical care costs onto employees. These costs are 4.5 percent higher than a year ago.

The price increases workers now face will soon include much higher interest rates for mortgages, home equity loans and credit card debt. The Federal Reserve has signaled that it will continue its commitment to raising interest rates through the next year. Purchasing power will deteriorate further as the rising cost of borrowing money hits consumers with heavier debt burdens. At the same time, if the dollar continues its plunge, prices will rise further, producing further erosion in real wages.

© 2004 Labor Research Association



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