Good News for Fed, Less So For Average Joe

Customers check out at a Costco Wholesale Corp. store in San Francisco

Photograph by David Paul Morris/Bloomberg

Customers check out at a Costco Wholesale Corp. store in San Francisco

Federal Reserve policy makers may be breathing a tad easier today after the Bureau of Labor Statistics’ consumer price report showed diminishing odds of deflation. Higher costs for food and rent helped boost consumer prices 0.2 percent in March, the most in three months. Over the last 12 months, the cost of living has increased 1.5 percent. The Fed would like to see it closer to 2 percent.

Households are probably thrilled. In supermarket checkout lines, they’re paying 6.8 percent more for ground beef, 5 percent more for fresh fruits and 5.9 percent more for whole milk than a year ago. Shelter costs were up 2.7 percent from March 2013, the biggest gain in five years. And for what it’s worth, the government’s seasonal adjustment process turned a 5.1 percent jump in gasoline prices from a month earlier, the biggest increase in a year, into a 1.7 percent decline.

And higher prices, of course, make paychecks smaller than they appear. Hourly earnings adjusted for inflation dropped 0.3 percent, the biggest decrease since February 2013. They were up just 0.5 percent over the past 12 months.
“Food price increases are expected to make further gains in the second quarter — a kick in the stomach for those households that have a hard time making ends meet,” Chris Christopher, director of consumer economics at IHS Global Insight, said in a note to clients. “Average consumers will have no cause to consider inflation rampant, but living standards will suffer as a larger percentage of household budgets are spent on grocery store bills, leaving less for discretionary spending.”

That’s a challenge for the Fed. There may be less risk of deflation, or broad-based declines in prices that can cause households and businesses to delay purchases in anticipation of even lower prices, but prospects for a consumer-led pickup in economic growth may dim. Until the job market is robust enough to propel wage growth, consumers will be hard-pressed to step up discretionary purchases if they’re paying more for the essentials — food, shelter and, to a lesser extent, clothing.

What do you think about this article? Comment below!