Consumers are squeezed as inflation outpaces wages

WASHINGTON – American families were squeezed last year as their inflation-adjusted weekly wages fell 1.6 percent — the sharpest drop since 1990 — even as consumer prices rose only modestly. Their spending power sank in the face of falling wages, job losses and higher prices for energy, medical care and education. Slack pay and scarce job creation are slowing consumer spending, hindering the economy's ability to mount a strong recovery. Overall consumer prices rose 2.7 percent last year, the Labor Department's Consumer Price Index showed Friday. A surge in energy prices last year offset the biggest drop in food costs in nearly a half century. Core inflation, which excludes the volatile food and energy categories, rose 1.8 percent for the 12 months ending in December. It matched the 1.8 percent rise in core inflation in 2008. Both gains were the smallest since a 1.1 percent rise in 2003. For December, the CPI rose a modest 0.1 percent. Excluding food and energy, prices were also up just 0.1 percent last month. Also Friday, the Federal Reserve said industrial production rose 0.6 percent in December as unusually cold weather helped energy utilities offset a small drop in manufacturing. It was the sixth straight monthly gain in production. But the mixed picture shows the economic recovery remains tepid, as consumers and businesses spent too little to spur the production of more factory goods. The 2.7 percent rise in overall consumer prices for 2009 followed a 0.1 percent increase in 2008, which had been the smallest gain in more than a half century.