With inflation rising, consumers are having to spend more on basic, everyday items. However, while inflation is rising, the number of people applying for unemployment benefits has reached the highest levels in three months. This is hurting the economy and preventing it from growing.
By CHRISTOPHER S. RUGABER
September 15, 2011, 4:10PM ET
Consumers are spending more to fill their tanks, feed their families and pay the rent. At the same time, the number of people applying for unemployment benefits has reached the highest level in three months.
The latest government data show that inflationary pressures and a depressed job market are hurting an economy that barely grew in the first half of the year.
Higher prices could also keep the Federal Reserve from taking major steps to stimulate the growth next week when policymakers meet.
When prices rise, consumers cut back on big purchases, such as appliances, furniture and vacations. Mixed reports on manufacturing Thursday and flat retail sales in August suggest that may already be happening.
A decline in demand forces businesses to put off hiring and even lay off workers. In August, the economy added zero net jobs. Unemployment benefit applications have increased in three of the past four weeks.
"Unless spirits improve soon, businesses will ramp up layoffs, consumers will pull back, and the economy will fall back into recession," said Mark Zandi, chief economist at Moody's Analytics.
Consumer prices rose 0.4 percent in August, according to the Labor Department's Consumer Price Index. Prices for food, energy, rent, and clothing all increased. Excluding volatile food and energy costs, core prices increased 0.2 percent.
Some inflation can be healthy for the economy because it encourages people to spend and invest rather than sitting on their cash. More spending drives corporate growth, which makes businesses more likely to hire people.
For the 12 months that ended in August, core prices surged 2 percent. That's the biggest year-over-year increase in nearly three years, and it's at the high end of the Federal Reserve's informal inflation target.
Rising inflation is a key reason Macroeconomic Advisors lowered its growth estimate for the July-September quarter from 1.9 percent to 1.6 percent. The economic consulting firm said higher prices will reduce consumer spending.
Economists don't expect prices to rise much further, mostly because employers aren't hiring much or handing out big raises. Still, the spike in prices over the past year has cut into consumers' pay and limited their purchasing power.
"In an environment where you're now looking at zero job growth, it will be difficult to have much success passing on any additional costs," said Tom Porcelli, chief U.S. economist at RBC Capital Markets.
Unemployment benefit applications rose to 428,000 last week, the Labor Department said in a separate report. And the four-week average, a less volatile measure, rose for the fourth straight week to 419,500, the highest level in eight weeks.
Applications need to fall below 375,000 to indicate that hiring is increasing enough to lower the unemployment rate. They haven't been that low since February.
The unemployment rate stayed at 9.1 percent for the second straight month in August. It has been above 9 percent for all but two months since May 2009 -- one month before the recession officially ended.
U.S. factories have helped drive growth over the past two years. But manufacturing began to falter this spring, slowed by supply chain disruptions caused by the Japan crisis and diminished consumer demand.
Overall factory output rose in August for the second straight month, according to a report from the Federal Reserve. The gain was driven by strong auto production. Carmakers have rebounded over the past two months, mostly because supply chains are flowing more freely.
Many economists took that as a positive sign in the otherwise gloomy data.
Still, two regional surveys from Federal Reserve banks showed manufacturing contracted in the Northeast and Mid-Atlantic this month.
"The common thread among all of today's data is one of weakness," Porcelli said.
The Fed will discuss additional stimulus measures at its two-day meeting next week. Most economists expect it will announce a plan to shift money out of short-term securities and into longer-term Treasury bonds. The move could lower rates on mortgages, auto loans and other consumer and business loans.
But some Fed officials are worried the Fed's policies could push inflation higher. Last month, three board members opposed the Fed's decision to keep interest rates near zero for the next two years, unless economic conditions changed dramatically. It was the first time as many members dissented from a decision in almost 20 years.
Fed Chairman Ben Bernanke acknowledged last week that rising commodity prices had pushed up inflation this year. But he said it was likely to moderate in coming months.
There are some signs that core inflation, which the Fed pays close attention to, could level off soon. Cotton prices have come down from the spring, and clothing costs are expected to follow. New-car prices were unchanged for the second straight month in August, after rising earlier this year.
"The combination of disappointing growth but rising core inflation puts the Fed in a difficult situation," said Michelle Meyer, an economist at Bank of America Merrill Lynch.
To see original article CLICK HERE