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The Honolulu Advertiser
Posted on: Thursday, January 19, 2006

Prices outpaced wages in '05

By Martin Crutsinger
Associated Press

WASHINGTON — The average American worker got squeezed in 2005 between the biggest jump in energy prices in 15 years and wages that failed to keep up with inflation.

As a result, hourly earnings after adjusting for inflation fell by 0.5 percent in December compared to what workers were earning in December 2004, the Labor Department reported yesterday.

Workers did see their wages rise last year. It was just that prices rose at a faster pace — 3.4 percent for the 12 months ending in December, the department said.

The 0.5 percent drop in inflation-adjusted hourly earnings last year followed a 0.7 percent fall in 2004 for the 80 percent of the U.S. workforce that is employed by the private sector in nonsupervisory jobs.

The main culprit in last year's jump in inflation was a 17.1 percent surge in energy prices, the biggest advance since 1990, as gasoline prices topped $3 per gallon for a time. The rise in energy accounted for 40 percent of the overall rise in prices last year.

At the White House, presidential spokesman Scott McClellan said energy prices were still too high and the president was committed to addressing that problem.

But Democrats pointed to the drop in inflation-adjusted earnings as further evidence that the typical American family is not faring well in the current economic expansion.

"Paychecks are being stretched thinner as families face higher prices for home heating, healthcare and education," said Sen. Jack Reed, D-R.I.

Jared Bernstein, an economist with the Economic Policy Institute, a liberal Washington think tank, said the problem has been that labor markets have not been tight enough to push employers to boost salaries while inflation has been gradually creeping higher.

Other analysts said the wage weakness was having an impact on consumer confidence.

"People see energy prices going up and they get a little worried about what they can afford to spend money on," said David Wyss, chief economist at Standard & Poor's in New York.

There has been hope that overall inflation will slow to around 2.5 percent in 2006. But that is based on a belief that after two years of big increases, energy prices will calm down, something that has not yet occurred.

This week, crude oil prices surged to 3 1/2-month highs, reflecting worries about a standoff with Iran over its nuclear program and supply disruptions because of violence in Nigeria. Oil prices did decline slightly yesterday, falling below $66 per barrel.

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