Buying Power Varies Among Economic Groups

The economic Recovery is working to outpace inflation.

Published on: Jun 6, 2011

Officially, U.S. inflation remains under control. The U.S. Department of Commerce Bureau of Labor Statistics pegged the April 2011 Consumer Price Index at 224.9. That's up from 218.0 a year earlier, a 1.03% rise. Changes in the CPI measure changes in the overall price level of a market basket of goods consumers buy.

Surges in food and fuel prices make many Americans sense that inflation in big components of their budgets outpaces official statistics.

Retail grocers, who routinely featured T-bone steaks at $4.99 a pound a year ago, now put them on sale at $5.99, 20% higher. Similar price hikes are evident all along the meat counter.

Economists point to strong domestic meat demand and solid demand for meat exports for pulling meat prices higher.  Working Americans and those sharing in economic recovery are driving domestic demand. Economic recovery elsewhere in the world and weakness in the dollar are boosting export demand. U.S. livestock producers need solid demand to continue.

Gasoline prices, though volatile, remain about a dollar a gallon higher than a year ago. Higher fuel prices boost transportation costs. That ups costs for almost everything consumers buy.

Who has buying power matters

Sticky-high unemployment is one of the forces holding down the inflation rate. Ample people looking for jobs mean employers do not have to bid up wages to get workers. That's a double-edged sword.

Stagnant wages help hold down inflation. But lack of pay raises restrains buying power of consumers, particularly those on the lower end of the wage scale who spend most of their earnings. Consumers who face higher prices, but level income have little choice other than reducing consumption of something. Lack of buying power is one reason why the U.S. economy is being slow to recover from the recession induced by the housing meltdown.

International issue

A weekly Brazilian central bank survey of Brazilian economists forecast Brazil's 2011 year-end inflation rate at 6.23%. That would be up from 5.9% in 2010 and 5.28% in 2009.

Brazilian data for May should show a long-awaited deceleration in the monthly inflation rate as food and fuel prices ease. Greater stability in food and fuel prices comes mainly on seasonal factors. Brazil's grain and oilseed crops go to market in May, as does the annual sugarcane crop.

Sugarcane feeds Brazil's huge ethanol market. Ethanol prices were flat through mid-May while gasoline prices rose only slightly.

"Many Brazilian consumers sense that inflation in items they buy also outpaces official rates," says Tarcisio Machado, a taxi driver in Belo Horizonte, a city of some 3 million inhabitants in southeastern Brazil. "For example, the price of provolone, a favorite cheese, in the same store, same brand advanced from $5.68 a pound to $6.53 a pound or 15% in a week."

Inventory and expiration date management might drive some of the price fluctuation. Still, Machado says that many Brazilians sense that prices are advancing faster than government officials want Brazilians to believe.

In early May 10,000 Policia Militar officers of Brazil's state of Minas Gerais converged on the state capital of Belo Horizonte to support their negotiators pushing for a 15% pay hike this year, 15% next year and 20% in 2013. The Policia Militar is Brazil's primary law enforcement agency.

"The governor has stalled negotiations until next month," says Luciano Morais, a cop on the street.

The police negotiating for raises well in excess of the official inflation rate suggests they're asking for more than they realistically expect to get, or inflation is higher than the official numbers, or likely some combination of both.

Any way you look at it, Brazil's inflation is well below the 1,000% to 4,000% per year that prevailed in the late 1980s and early 1990s. And that's a good thing for the Brazilian economy, if for no other reason than Brazilian workers no longer waste countless hours standing in long lines at banks to cash their paychecks so they can buy what they need before prices ratchet even higher.

Editors note. John Otte is traveling in Brazil studying the Brazilian economy and culture.