Money News (Link) - Forrest Jones (March 21, 2011)
The cost of living in the United States is as high as ever, even worse than before the financial meltdown during the past few years.
A Labor Department index measuring the actual cost of living, known as the chained consumer price index, hit 127.4 in February, beating a previous record high 126.9 in July 2008, just as the housing crisis began to tighten its grip, CNBC reports.
That�s bad news for most Americans, especially considering the record comes at a time of weak economic activity and high unemployment rates.
�The Federal Reserve continues to focus on the rate of change in inflation,� says Peter Bookvar, equity strategist at Miller Tabak, according to CNBC.
�Sure, it�s moving at a slower pace, but the absolute cost of living is now back at a record high in a country that has seven million less jobs.�
The regular inflation rate, known as the consumer price index, increased 0.5 percent last month, the fastest pace in 18 months, although the Federal Reserve tends to set interest rates at inflation rates stripped of food and energy, which rose by just 0.2 percent.
Some say a new methodology is needed and needed now.
�This speaks to the need for the Fed to include food and energy when they look at inflation rather than regard them as transient costs,� says Stephen Weiss of Short Hills Capital.
�Perhaps the best way to look at this is to calculate a moving average over a certain period of time in order to smooth out the peaks and valleys.�
Even though headline inflation rates may have been nominally much higher in the past, most notably in the early eighties, rising consumer prices hurt just as bad today with incomes remaining flat, if not worse.
Thirty years ago, people earned raises to cope with higher prices and investments returned more: banks would pay nearly 16 percent on a six-month CD, the Associated Press reports.
Today, however, money market rates are a fraction of what they were, wages are essentially frozen if not dipping and Social Security recipients have gone two straight years with no increase in benefits.
�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.�
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, according to the Census Bureau.
The figure represents a 0.7 percent drop from 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, according to the Associated Press.
That would mark a 0.3 percent drop from 2009, and incomes should fall again in 2011.
Significant pay raises are rare during periods of high unemployment because workers have little bargaining power to demand them. �
America ~ Economic Crisis