With Inflation Benign, Workers Saw Solid Real Wage Gains At Year-End

The rate of inflation remained subdued last month, helping boost workers’ real wages at year-end and giving the Federal Reserve breathing space as it continues its stimulus programs to support the economy.

Consumer prices on the whole were unchanged in December from the prior month, thanks to a drop in gasoline prices as well as declines in the cost of used cars, drugs and clothes, the Bureau of Labor Statistics said. Offsetting those declines were steady price gains in rents, medical services and food.

Overall, the consumer price index last month was up 1.7 percent from a year earlier, improved slightly from the 1.8 percent one-year gain in November. With inflation tame, real average hourly earnings rose a solid 0.3 percent in December from November, and average weekly wages jumped 0.6 percent as workers put in more hours in their jobs last month.

This was the second straight month of healthy gains in real wages, and helped boost holiday spending, analysts said. But don’t count on it continuing. It “is not sustainable given 2013 tax increases,” said Diane Swonk, an economist at Chicago-based Mesirow Financial.

For the Fed, the more meaningful inflation measure is the change in consumer prices excluding the volatile categories of energy and food. Stripping those elements out, the core consumer price index went up a modest 0.1 percent last month from November. The core one-year inflation rate in December remained unchanged at 1.9 percent – just below the Fed’s 2 percent target.

While some experts are concerned about the inflationary implications of the Fed’s stimulus policies, for now there’s little sight of rising pressures on consumer prices. And that will allow the central bank to focus, as it has, on the second part of its dual mandate, maximizing employment. The Fed has said it will keep short-term interest rates at near zero until the unemployment rate dips below 6.5 percent, so long as the inflation outlook doesn’t exceed 2.5 percent.

“Inflation is set to further moderate in the near term even as prior increases in input prices are passed through,” said Moody’s Analytics senior economist Arijit Dutta, citing weaker-than-expected producer and import prices in December. And even though annual core inflation is likely to march higher this year, he said in a note to clients Wednesday, it should still stay within the range of 2 percent.

“This will allow the Federal Reserve breathing room as it continues to implement unconventional policies,” he said.