Consumer Wages Squeezed By Inflation

Consumers have been under attack economically for a year and a half due to the impact of the recession, and now a new front is forming. The US government recently issued a report that showed consumer wages are being outpaced by inflation.

As unemployment continues to remain at 10 percent, it has become doubtful whether consumer spending will be able to play any significant role in propelling the economy out of the recession. With inflation making its debut after a period of declining prices, it becomes even much less likely that spending can drive an economic recovery.

Though prices are rising only at a moderate rate, consumer wages still fell 1.6 percent in 2009 when inflation adjusted. Another way to state this is that consumers lost 1.6 percent in buying power. A dollar in 2009 will buy 1.6 percent less than a dollar in 2008. This is yet more bad news for consumers already struggling to make ends meet. The 1.6 percent decline in average weekly earnings for employees is the largest drop in a single year in twenty years.

There are more reasons than just inflation for the loss of consumer purchasing power. First is the fact employers have not been giving raises or cost of living increases. Second is the fact new jobs have become scarce and it is new job growth that often drives wages up in a competitive environment. This picture is not expected to change soon either.

Consumers are facing much more than just a loss of purchasing power though. Inflation may be modest, but other costs are rising including health care. Many families have lost their health care coverage after being laid off meaning the family must now pay for expenses that were once covered. Making an already bad situation even worse is the fact that health care costs are rising at the same time.

Other expenses that keep rising include utility bills, college tuition and fees, and interest and fees on credit cards. Many families are falling behind in their payments or are just barely staying even from month to month. Balancing household expenses under these circumstances can be very difficult.

Some of the best advice consumers can follow is to not ignore any bills or accounts. If unable to make timely payments it is important to contact the vendor or lender. Many businesses and banks today are working very hard to help consumers deal with their financial problems by lowering payments and extending the time allowed for payoff. Some companies will forgive interest and penalty charges also if the consumer is unemployed.

The good news is that inflation is expected to stay low through 2010. But most consumers should not count on a raise because the economy has lost 7.2 million jobs over the last two years. With so many people looking for work and an economy that is still struggling, most employers are not motivated to increase wages. Of course many firms simply cannot afford it either.