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Energy prices push inflation index up in January; Midwest hardest hit

During the frigid January cold spell, Midwesterners saw piped natural gas prices rise 7.2 percent from December, more than twice the national average price rise of 3.5 percent. Gasoline rose 5.9 percent regionally, compared to a 4.2 percent rise nationwide for the month, and energy prices in general in the Midwest were up 5.1 percent, compared to a 4.9 percent climb nationwide.

The recent government inflation numbers show how sensitive prices in the Twin Cities metro and the Midwest region are to volatile energy price swings. The monthly Consumer Price Index (CPI) issued by the U.S. Bureau of Labor Statistics (BLS) [PDF] showed that prices for the entire basket of goods and services that make up the CPI inched up 0.3 percent nationwide from December to January, with the Midwest region seeing the biggest hike at 0.5 percent. Backing out the impact of energy, prices would have inched up 0.1 percent nationwide but remained flat in the Midwest, demonstrating the relatively larger impact energy prices had on the region’s economy last month.

The uptick in month-to-month inflation numbers, unadjusted for seasonal variations, continues a trend we’ve seen since July and threatens to reverse a decline in the CPI for all of 2009 compared to 2008, driven by steep drops in energy prices last year.

*Not seasonally adjusted
Source: BLS
*Not seasonally adjusted

The Twin Cities metro area CPI dropped 0.5 percent in 2009 compared to 2008, due to a 21.5 percent drop in all energy prices and a whopping 34.5 percent decline in piped natural gas prices, according to the BLS. Backing out the energy price decline benefit, the Metro area CPI rose 1.5 percent last year. In other words, energy prices swung the overall cost of living 2 percent for Twin Cities residents last year. While the steep energy price declines in 2009 followed the equally steep price jumps in 2008, it demonstrates how sensitive the CPI can be to the volatile energy sector, even in the Metro area with an arguably diverse economy.

Looking at the Midwest region and the U.S in 2009 compared to 2008, energy prices declined 19.8 percent and 18.4 percent while the overall CPI declined 0.6 percent and 0.4 percent respectively. Backing out that benefit, prices rose 1.7 percent both regionally and nationally last year.

While energy swung the big stick, there were plenty of other puts and takes in prices last year.  Other goods and services and recreation also contributed to the decline in the CPI for 2009 nationwide, but to a lesser extent. The components for medical care, food and beverages, education and communication, and apparel were all higher in 2009 compared to their 2008 annual averages.

Since roughly two-thirds of the U.S. economy is consumer driven, the ability and appetite for consumers to spend is a critical component of economic recovery.  Looking at the impact of inflation on wages, the BLS reported that real average hourly earnings rose nationwide to keep pace with CPI rise in January compared to December, on a seasonally adjusted basis. For all of 2009, the news was not good for wage earners as real average hourly earnings fell 0.9 percent, seasonally adjusted, from January 2009 to January 2010.

For employers, however, the news was better as the cost of employment (wages, salaries and benefits) posted the lowest overall rise since the BLS began reporting these numbers in the mid to late 1970’s, rising 1.5 percent on an annual basis for the last quarter of 2009 and matching the rise in the third quarter.

The important measure of hours worked, a real marker of economic recovery for most economists, ticked up 0.1 hour to 33.9 hours in January for total non-farm private employment while manufacturing hours worked continued its seven month rise in January to 39.9 hours.

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