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Prices Rise, Consumer Spending Remains Low in US

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(Photo: Gisela Royo)
(Photo: Gisela Royo)

ECONOMY

  • Prices up 0.2% last month, lower than predicted
  • Core inflation expected to rise 1.6% but remain below 2%
  • Prices likely to stabilize as employment increases

Consumer prices in the US increased by 0.2% last month, a figure slightly lower than expected.

The Consumer Price Index, or CPI, is the broadest of three price gauges by the US Labor Department and includes both goods and services. The current rise in consumer prices is due to higher gas, food, rent and clothing prices.

Consumer prices have risen by 2.9% in the past 12 months.

Specifically, food and energy prices rose 0.2% last month alone, with energy costs up 6.1% year-on-year. Also on the rise are transportation prices, which increased 0.3% in January; apparel prices, up 4.7% since last year and 0.9% in the past month; housing prices, which are 1.9% higher than last year; and rent, which was up 0.2% in January.

Although higher rent is expected to add to inflation, the Federal Reserve expects core inflation to increase by 1.4% to 1.6% in 2012, which is still below its target interest rate of 2%.

Inflation Adds to Consumer Pressure

The Federal Reserve has plans to hold its benchmark interest rate near the record low until 2014 due to low inflation. If inflation remains low, it will likely consider a second round of quantitative easing.

Some economists believe inflation may be leveling off. Guy LeBas, a fixed income strategist for Janney Montgomery Scott, told the Associated Press he believes the current price rise is simply a delayed reaction to the rise in commodity prices. For instance, higher clothing prices are due to last year's higher cotton prices.

Retailers are still unwilling to increase prices because they are counting on discounts to bring in customers. As a result of higher employment and holiday discounts, consumption is expected to improve slightly.

Prices for urban workers and average hourly earnings have both increased 0.2%, with real weekly earnings down 1% over the past 12 months. In a note to clients, Naroff Economic Advisors' President Joel Naroff wrote: “While inflation has moderated, it is still high enough to wipe out worker earnings.”

Although the labor market is improving, paychecks are unable to cancel out even a small amount of inflation.

Low inflation may actually encourage business and consumer spending as buyers seek cheaper purchases before prices rise any further. The Federal Reserve announced end of January that “inflation had been subdued in recent months and longer-term inflation expectations have remained stable.”

If inflation levels out as predicted, prices will likely stabilize as employment continues to increase.

Key Statistics – Energy Utilities in the US (source: MarketLine)

  • In 2010, the gas utility industry in the US reported revenue exceeding $177 billion.
  • The US gas utility industry is expected to accelerate to a CAGR of 1.5% by 2015, to hit over $190 billion.
  • In 2010, the natural gas industry in the US reported over $110 billion in revenue.
  • From 2010 to 2015, the US natural gas industry is expected to increase at a rate of nearly 3% CAGR, driving value to $126 billion.

By Nicole Manuel for
Nicole Manuel is a freelance economics, finance and blog writer with a degree in economics and over two years of experience.

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