Inflation Outpacing Compensation for U.S. Workers

Gas and clothing prices pushed inflation upward in January

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On a national level, the economic recovery seems to be picking up steam. But according to new data from the U.S. Department of Labor, American workers may be having a tough time just keeping up.

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Friday's figures show wages were just keeping pace with prices in January. Hourly and weekly earnings, as well as the consumer price index, the government's measure of inflation, all increased by 0.2 percent last month. Data suggests that over the last year, the trend has been worse. The CPI grew by 2.9 percent on an annual basis through January 2012, barely changed from its 3 percent annual growth as of December.

However, real hourly compensation fell during that period. The inflation-adjusted measure that includes both wages and benefits dropped by 1.2 percent over the course of 2011. That was the largest such decline since falling by 1.7 percent in 1989.

January's CPI increase was driven by a jump of 0.9 percent in gas prices. Turmoil in the Middle East has helped to push those prices higher, and analysts have predicted that gas prices could approach $4 or even $5 per gallon this summer.

Even without that added volatility, the data show that prices in January grew across the board. Food costs grew by 0.2 percent, and core CPI, which does not include food and energy costs, went up by 0.2 percent, with clothing prices increasing sharply, at 0.9 percent. Altogether, core prices grew by 2.3 percent from January 2011 through January 2012, its largest annual increase since September 2008.

Outside of mitigating factors like foreign unrest and volatile commodity prices, economic growth can account for some of the recent inflation hikes.

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"Fundamentally, the economy's not going gangbusters by any stretch...[but] we are growing, and the amount of slack in the economy has come down," says Ken Matheny, senior economist at Macroeconomic Advisers, an economic consulting firm in St. Louis, Missouri.

Given the continued worries about gas prices, as well as continued growth and accommodative Federal Reserve policy, prices nay not flatten anytime soon.

"If we are to get real wages to rise faster and add to spending power, inflation must come down and/or wage increases accelerate," writes Joel Naroff, president and chief economist of economic consulting firm Naroff Economic Advisors, in an E-Mail. "It is hard to see how inflation will moderate significantly, so if the economy is to grow faster, wage gains must improve."

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