WASHINGTON (AP) — Inflation spooked the nation 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 '80's, the money people made typically
more than made up for high inflation. In 1981, banks would pay nearly 16
percent on a six-month CD. And workers typically got pay raises to match their
higher living costs.
No more.
Over the 12 months that ended in February, consumer
prices increased 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," says Judy Bates, who lives near Birmingham, Ala. "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 says.
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 increases 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 U.S. inflation-adjusted household income
— wages and investment income — fell to $49,777 in 2009, the most recent year
for which figures are available, the Census Bureau says. That was 0.7 percent
less than in 2008.
Incomes probably dipped last year to $49,650,
estimates 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 $49,300, she says.
Significant pay raises are rare during periods of
high unemployment because workers have little bargaining power to demand them.
They surely aren't making it up at the bank. Last
year, the average nationwide rate on a six-month CD was 0.44 percent. The rate
on a money market account was even lower: 0.21 percent.
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 Civil War.
As interest rates soared, CD and money-market rates
did, too. The average rate on money market accounts topped 9 percent. Treasury
yields surged, pushing up rates on consumer and business loans. The 10-year
Treasury note yielded more than 13 percent; today, it's 3.5 percent.
Even after accounting for inflation, the median
income rose 3.1 percent from 1983 to 1984. At the time, workers were demanding
— and receiving — higher wages.
More than 20 percent of U.S. workers belonged to a
union in 1983. Labor contracts typically provided cost-of-living adjustments
tied to inflation. And competition for workers meant those union pay increases
helped push up income for non-union workers, too.
Last year, just 12 percent of U.S. workers belonged
to unions. And among union members, a majority now work for the government, not
private companies. Wages of government workers are under assault as state
governments and the federal government seek to cut spending and narrow gaping
budget deficits.
Workers' average weekly wages, adjusted for
inflation, fell in February to $351.89. It was the third drop in four months.
The result is that even historically low inflation
feels high. So "when you mention low inflation to real people on the
street, they immediately roll their eyes," says Greg McBride, senior
financial analyst at Bankrate.com.
Falling behind inflation is something many people hadn't
experienced much in their working careers until now. In the 1990s and 2000s,
for instance, most Americans kept ahead of rising prices. Inflation averaged
under 3 percent.
And inflation-adjusted incomes rose steadily from
1994 to 1999. Once the 2001 recession hit, incomes did falter. But after that,
they resumed their growth, rising each year until the most recent recession hit
in December 2007.
Rates on six-month CDs were also much higher than
they are now: They averaged 5.4 percent from 1990 to 1999 and 3.3 percent from
2000 to 2009.
These days, though, Americans face the certainty of
higher prices ahead.
Whirlpool, Kraft, McDonald's, Clorox, Kellogg, and
clothing companies such as Wrangler jeans maker VF Corp., J.C. Penney Co., and
Nike say they plan to raise prices. Whirlpool, which makes Maytag and
KitchenAid appliances, says it's raising prices in response to higher raw
material costs.
Kellogg, which makes Frosted Flakes and Pop Tarts,
is increasing prices on some products to offset costlier ingredients. Kellogg
is responding to soaring costs for commodities including wheat, corn, sugar,
cotton, beef and pork.
Vickens Moscova, a self-employed marketer in
Elizabeth, N.J., says he's paying more for staples like cereal, bread, eggs and
public transportation. Yet he's making little from his savings.
"It is a huge pinch," says Moscova, 25.
Though higher gasoline and food prices may lift the
inflation rate in coming months, the Fed says it doesn't think inflation will
pose a long-term threat to the economy. The central bank projects that
inflation won't exceed 1.7 percent this year.
But if oil prices, now around $101 a barrel, were
to go much higher, economists say heavier fuel bills would cause people and
consumers to cut back spending on cars, appliances and other items.
Another recession would be possible if prices began
to approach $150 a barrel. Back in 1983, a barrel of oil cost just $29.40 — or
$65 in today's prices, adjusted for inflation.
All that said, today's consumers are fortunate that
today's lower rates mean one major household cost remains far lower than in the
1980s: a mortgage.
Thanks, in part, to the Fed's efforts to push down
loan rates starting with the financial crisis, the average rate on a 30 year
fixed mortgage is below 5 percent.
The comparable rate in 1981? 18 percent.
Copyright
2011 The Associated Press.
