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Job gains should offset higher gas and food prices

Job gains should offset higher gas and food prices

May 12th, 2011 in News

WASHINGTON (AP) - Consumers spent more in April, but most of their money went to pay higher food and gas prices.

The rising cost of basic necessities is threatening to slow economic growth in the coming months. But hiring gains are the best in five years, commodity prices are easing, and gas prices could follow in the weeks ahead.

Economists say the stronger job market will offset the impact of inflation and drive the economy in the second half of the year.

"If this is the full hit from the rise in gas prices, it is no big deal," said Ian Shepherdson, chief U.S. economist for High Frequency Economics.

More expensive gas boosted retail sales 0.5 percent in April, the 10th straight month of gains. But excluding gas station sales, the increase was only 0.2 percent, the Commerce Department said Thursday.

Companies also paid more for raw materials and factory goods in April, mostly because energy prices jumped for the seventh straight month.

The Labor Department said its producer price index, which measures price changes before they reach the consumer, rose 0.7 percent. But after taking out volatile food and energy categories, core wholesale prices increased only 0.3 percent, the same gain as the previous month.

Fuel prices have been surging in recent months. The nationwide average for gas has hovered slightly below $4 per gallon. Economists are worried that higher fuel costs will leave motorists with less money to spend on other discretionary goods. That would slow economic growth.

Consumers are paying more for food, too. Grocery stores sales jumped 1.5 percent, according to the retail sales data. That's triple the March increase and a reflection of higher prices.

But commodity prices have dropped in recent days, hinting that inflationary pressures could cool in the coming months. Oil prices ticked up slightly Thursday to near $99 a barrel. But that's still down from nearly $114 a barrel last week. Corn prices fell sharply Wednesday and have been little changed on Thursday.

Paul Dales, an economist at Capital Economics, said higher energy and agricultural commodity prices could push the 12-month increase in wholesale prices to 8 percent in the coming months. But it would likely be a temporary spike.

"With commodity prices now falling, both producer and consumer price inflation are likely to drop sharply in the second half of the year," Dales said.

The retail sales data wasn't all bad. While April marked the smallest increase in nine months, the government did revise the previous two months to show stronger sales gains in March and February.

And the government report was at odds with sales data from 28 of the nation's biggest retail chains. The International Council of Shopping Centers said those retailers enjoyed strong sales last month. And over the past two months, they saw sales rise 5.25 percent compared to the same period a year ago. That's the strongest spring since 1999.

Many economists say a brighter outlook for hiring should blunt the impact of inflation. Companies have added an average of 250,000 jobs a month in the past three months, the biggest hiring spree in five years. The unemployment rate has dropped nearly a full percentage point since November.