Paychecks Can't Keep Up With Rising Prices

Enlarge this image toggle caption Steven Senne/AP Steven Senne/AP

Anyone who has filled a gas tank or shopped for ground beef recently knows that prices are headed higher.

But while many retail prices may be moving up, workers' wages are remaining flat. The mismatch between rising prices and stagnant wages is putting a squeeze on workers this year.

On one side of the misery equation, Americans have been seeing retail prices rise at an annualized rate of more than a 5.6 percent so far this year, according to the Bureau of Labor Statistics.

Plus, the upward pressure on prices is growing as crude oil prices keep heading higher. U.S. crude oil has been trading at more than $110 a barrel, sending the average price of a gallon of gasoline up to $3.74 a gallon — compared with $2.86 a year ago, according to AAA, the auto club.

Last week, Federal Reserve Chairman Ben Bernanke said he is watching inflation data closely, but still feels this recent surge in prices is "transitory" and should ease soon.

In Europe, however, the central bankers are taking the opposite position. On Thursday, they stopped watching for signs of inflation and took action, raising interest rates to slow economic growth. Their goal is to tamp down consumer demand enough to cool price hikes.

Consumers Feel The Squeeze

No matter what happens with inflation in coming months, Americans are feeling the price pressure right now, especially at the grocery store. Food inflation was tame in 2010, but has taken off in 2011, with big run-ups in prices for beef, milk, vegetables, fruits and butter.

Wages Vs. Inflation Since the start of 2011, wages and prices have been moving in opposite directions.

Notes Inflation data not yet available for March 2011.

Even as those prices were rising, wages were falling flat. BLS reports show U.S. hourly workers got no pay increase at all in four of the last five months. In March, average weekly earnings amounted to $784.44 — not one penny more than in February.

That lack of wage growth has come at a difficult time for people who drive to work. The typical U.S. driver buys 12 gallons of gas per week. Because of the run-up in prices, filling up weekly now costs roughly $40 a month more than last year. But the average weekly wage is up only $18 from last year. In other words, gas prices alone eat up more than half the average worker's wage increase.

Patrick DeHaan, senior petroleum analyst for a fuel-tracking website called Gasbuddy.com, says the higher gas prices are hurting consumers. "For people who have limited income, gas comes ahead of everything else — even if it means less food on the table," he says. That's because most people have no realistic alternative to driving to work and must purchase gas, he says, no matter what the cost.

By summer, DeHaan expects the national average price of a gallon of gas to be around $4.05.

Shoppers See Harder Times Ahead

Of course, not every price is rising. Home values are still falling, and technology keeps getting cheaper. So, for example, smartphone prices generally are falling.

But most people don't buy a house, or even a phone, very frequently. They do purchase gasoline and milk often, and those high-visibility price increases are creating a negative feeling about the economy. The Conference Board, a business group that conducts a monthly consumer survey, finds that the shoppers' mood is darkening.

"Consumers' inflation expectations rose significantly in March and their income expectations soured," said Lynn Franco, director of the group's Consumer Research Center.

In theory, employers should be able to afford to give workers cost of living raises. In the fourth quarter of last year, corporate earnings — as measured by the S&P 500 Index — were up 31 percent. Analysts expect first-quarter earnings, which are just starting to come out, to show healthy gains again.

Wall Street Is Gaining, But Not Workers

With corporations enjoying big profits, strong productivity gains and higher stock prices, conditions would seem to be good for raises. But employers are still uncertain about the future and wary about hiring. Their reluctance to increase the payroll has created an enormous pool of unemployed, but willing workers. More than 13 million people are seeking jobs. So most employers don't have to offer higher wages to retain existing workers, or attract new ones.

The real problem for workers is that while U.S. companies aren't creating many jobs, employers in developing nations, especially China and India, are hiring. Those foreign employers are creating new consumers, who are pushing up demand for food and oil and other commodities.

So that's the core of the issue: Americans are facing a slack job market, but must shop for the same food and oil and iron that people in other countries want. That creates a painful mismatch — low wage growth with higher commodity prices.