Inflation and the Economy

Martin Crutsinger at AP has this story:

Consumer prices rose in 2007 at the fastest pace in 17 years as motorists paid a lot more for gasoline and grocery shoppers paid higher food bills. However, falling prices for clothing and new cars offset some of those gains.

The Labor Department reported that consumer prices rose by 4.1 percent for all of 2007, up sharply from a 2.5 percent increase in 2006. Both energy and food prices jumped by the largest amount since 1990.

Prices were also up sharply for health care, housing and education. However, these gains were offset somewhat by falling prices for clothing, new cars and computers.

Workers’ wages failed to keep up with the higher inflation. Average weekly earnings, after adjusting for inflation, dropped by 0.9 percent in 2007, the fourth decline in the past five years. The lagging wage gains are cited as a chief reason many workers have growing anxiety about their economic futures.

Providing further evidence of a slowing economy, the Fed reported that output at the nation’s factories was flat in December, the worst showing since an outright decline of 0.5 percent in October. Economists said that poor reading confirmed their view that the manufacturing sector has slipped into a recession.

In a separate report, the Fed said its latest survey of economic conditions around the country showed the economy was losing momentum heading into 2008 although seven of the 12 Fed regions did report slight increases in activity.

The mounting signs of economic weakness have greatly raised concerns that the economy could be slipping into a recession. Unemployment jumped from 4.7 percent in November to 5 percent in December, the biggest one-month increase since the aftermath of the 2001 terrorist attacks. Many of the nation’s biggest financial institutions have been reporting billions of dollars in losses, reflecting the meltdown in the subprime mortgage market that was triggered by a two-year long slump in housing.

The December weakness in industrial production reflected flat output at U.S. factories. For the year, output at auto plants fell by 4.1 percent as Detroit continues to struggle with falling demand in the face of soaring gasoline prices. Industries connected to the troubled housing sector including wood products and furniture also suffered big declines for the year.

“We believe that today’s report confirms that manufacturing is in a recession,” said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI. “General growth in exports and a few bright spots in aerospace, high tech and medical equipment cannot mitigate weak consumer spending and increasingly slow and cautious business investment activity.”

Of course, people who don’t ask this question will suggest tax cuts as the perennial solution to everything…