The Consumer Price Index for October 2014 came in at an inflation rate of zero versus an average rate of 1.7% over the last year, according to the U.S. Bureau of Labor Statistics.  The decline was entirely due to a 5% drop in energy costs.  But with wages stagnant and every other cost other than wages rising, Americans are being squeezed.

The success of U.S. fracking exploration and development for domestic oil and gas sent energy prices plunging for the fourth month in a row, pushing the "headline inflation rate" below the U.S. Federal Reserve’s 2.0% inflation target.

Although some analysts have expressed concerns the United States may be about to suffer deflation, the costs for housing, airline fares, household furnishings, medical care, recreation, personal care, tobacco, and new vehicles increased much faster than the inflation rate.  Further offsetting lower energy costs, food eaten at home and away rose 3.3% percent over the last 12 months, the largest annualized gain since April 2012.

Despite the fact that the non-seasonally adjusted 2.03% annual job growth rate is the fastest pace since the 2006 peak of the housing bubble, national wage growth slowed to a 0.1% gain last month and up only 2% over the past year.  The Obama administration made a big deal of the unemployment rate falling to 5.8% in October, but the biggest contributor was 41,800 new jobs in the notoriously low-wage food services.  This record employment growth coupled with poor wage growth is unheard of since World War II. 

A recent Goldman Sachs analysis suggests that average wages are lower than most people believe.  According to the CIA World Factbook, Americans’ 2013 annual per capita income was $52,800, or about $25 an hour.  Using MIT’s living wage calculator to estimates the minimal living costs to support a family of two parents with two children for every county in every state, both average American parents need to earn nearly $20 an hour each to meet all their basic needs.  These statistics would suggest that most families in America should be able to afford more than their basic needs.

But when Goldman Sachs analyzed data compiled by the Bureau of Labor Statistics, they found that over half of all Americans earn less than $20 an hour, while nearly 20% earn less than $12.50 an hour.  Goldman concluded that low wages are hurting consumer consumption and explain why nearly 80% of Americans are worried about the economy.

Gasoline prices falling 6.3% in October and 8% over the last three months are welcome news to financially strapped families, because sub-$3 prices per gallon will save consumers $250 million per day.  It should also be good news that commodity prices for natural gas declined by 2.7% in October, and the fuel oil decreased by 4.0%.

But in contrast to crumbling commodity costs, the prices paid for residential electricity actually rose 0.5% in October.  Regardless of oil and gas prices falling over the last twelve months, average cost for residential electricity rose 3.2% nationally and vaulted 11.8% for New England during the same period.   

The producer price index (PPI) is a good indicator of future inflation trends because it tracks wholesale input prices that drive the cost of finished manufactured goods.  The PPI rose by 0.2% in October, versus an expected decline of -0.1% typical of the early winter economic slowdown.  Core annualized input prices paid rose at a rate of +4.8% and were held down only by energy input prices falling at a -3.6% annual rate.

Declining energy costs and slow wage growth are typical of an economy with rising unemployment and headed into a recession.  The reason why nearly 80% of Americans are worried about the economy is because nearly 80% of Americans are being economically squeezed by inflation outpacing their wage growth.  If energy costs were not falling fast, 80% of Americans right now would be getting squashed.  

Chriss Street suggests that if you are interested in the U.S. economy, please click on “America's NATO Allies will Force Keystone XL Approval Next Year.”