From rents and more, price hikes are hit­ting

The Progress-Index - At Home - - NEWS - By Christo­pher S. Ru­gaber

WASHINGTON — Apart­ment rents are up. So are prices for res­tau­rant meals, hair­cuts, gym mem­ber­ships and a cup of cof­fee.

For Amer­i­can con­sumers who have be­come used to flat or even fall­ing prices for sev­eral years, an un­fa­mil­iar sight has emerged in many corners of the econ­omy: In­fla­tion is tick­ing up.

The price in­creases re­main mod­est. And in many cases, they’re can­celed out by price declines for other items that are keep­ing over­all in­fla­tion his­tor­i­cally low.

Yet the stepped-up price tags for a range of con­sumer items are the largest since the Great Re­ces­sion ended six years ago. They ac­tu­ally re­flect a health­ier econ­omy: Many busi­nesses have fi­nally grown con­fi­dent enough to pass their own higher costs on to con­sumers with­out fear of los­ing cus­tomers. Em­ploy­ers have added nearly 5.6 mil­lion jobs the past two years, al­low­ing more peo­ple to ab­sorb higher prices.

Signs of emer­gent in­fla­tion are a key rea­son the Fed­eral Re­serve, which is meet­ing this week, will likely raise in­ter­est rates from record lows later this year. In­fla­tion has long trailed the Fed’s 2 per­cent tar­get rate but is on track to re­turn to that level in com­ing months.

“That should give the Fed a lit­tle more con­fi­dence that ... they will meet their (in­fla­tion) ob­jec­tive,” said Laura Ros­ner, an economist at BNP Paribas.

In June, the price of hair­cuts jumped 1.6 per­cent, the big­gest monthly jump in the 62 years that the gov­ern­ment has tracked the data. Over the past year, they’ve surged 2.8 per­cent, the largest year-over-year gain since 2008.

That’s no sur­prise to Chrissie Crosby, a re­tired gov­ern­ment worker in Alexandria, Vir­ginia. She says her hair sa­lon has started charg­ing nearly $30 for a sham­poo, blow dry and hair­cut, up from $22.

“It used to be a con­ve­nient place for

a trim, be­cause it was in­ex­pen­sive, but it’s no longer very in­ex­pen­sive,” she said.

Cof­fee prices jumped 6.1 per­cent in Jan­uary from 12 months ear­lier, the most in nearly three years. Star­bucks has re­sponded by rais­ing the price of a cup of cof­fee by be­tween 5 cents and 20 cents.

And beef prices have soared nearly 11 per­cent in the past year, which has led Chipo­tle to raise prices for steak and its beef bar­ba­coa by an av­er­age of about 30 cents per en­tree, the com­pany says.

The big­gest driver of in­fla­tion this year has been residential rents. They climbed 3.5 per­cent in June from a year ear­lier, the fifth straight month with an an­nual gain of that size.

Over­all, con­sumers have yet to be hit by sig­nif­i­cant in­creases for ev­ery­day pur­chases. In­fla­tion as mea­sured by the con­sumer price in­dex has barely risen in the past 12 months, mostly be­cause cheaper gas has held down the in­dex.

But prices are ris­ing. If you ex­clude food and energy, which tend to fluc­tu­ate sharply, “core” in­fla­tion has risen 2.3 per­cent at an an­nual rate in the past three months. In April, the three-month an­nual pace was 2.6 per­cent, well above the Fed’s in­fla­tion tar­get.

Econ­o­mists ex­pect the price in­creases to con­tinue, in part be­cause they’re oc­cur­ring mostly in ser­vices, whose prices tend to be com­par­a­tively sta­ble. Econ­o­mists call these “sticky” prices. They in­clude rent, in­sur­ance, hair­cuts, res­tau­rant meals and util­ity bills.

Sticky prices are slow to change. Util­i­ties typ­i­cally must ask reg­u­la­tors to ap­prove price in­creases, for ex­am­ple, and most restau­rants don’t want to fre­quently re­print menus. But once prices in those cat­e­gories do rise, they’re usu­ally slow to change course.

The Fed­eral Re­serve Bank of At­lanta main­tains an in­dex of sticky prices, which has risen 3 per­cent at an an­nual rate in the past three months, the most since the re­ces­sion ended.

La­bor costs for many ser­vice-sec­tor com­pa­nies are ris­ing, lifted by min­i­mum wages in an in­creas­ing num­ber of states. Chipo­tle just raised prices 10 per­cent in San Fran­cisco partly be­cause of that city’s min­i­mum wage in­crease.

Jack Har­tung, the com­pany’s chief fi­nan­cial of­fi­cer, said Chipo­tle has seen “no re­ac­tion what­so­ever” from cus­tomers.

By con­trast, prices for goods in some cases keep fall­ing. Cloth­ing, fur­ni­ture, and many ap­pli­ances are cheaper than they were a year ago, a re­sult of global com­pe­ti­tion that’s held down the costs of fac­tory goods.

And ga­so­line and nat­u­ral gas is much cheaper than they were last year. Through the first half of 2015, the av­er­age re­tail ga­so­line price is down 30 per­cent to $2.47 a gallon. Residential nat­u­ral gas prices are down 9 per­cent, ac­cord­ing to the Energy In­for­ma­tion Ad­min­is­tra­tion.

A big rea­son prices for ser­vices have risen is that they’re in­creas­ingly where Amer­i­cans are spend­ing money. Con­sumers spent just 32 cents of ev­ery dol­lar on goods in the first quar­ter of this year, down from nearly 34 cents two years ago. Over the same pe­riod, ser­vices spend­ing rose to 67.6 cents from 66.

“Peo­ple are fi­nally get­ting back to the com­forts they may have af­forded prior to the re­ces­sion, in­clud­ing splurg­ing on hair­cuts and home clean­ing ser­vices,” says Jack Klein­henz, chief economist at the Na­tional Re­tail Fed­er­a­tion.

Still, for many fam­i­lies that re­main squeezed by slug­gish pay growth, even small price in­creases hurt. Av­er­age hourly earn­ings rose just 2 per­cent in June from a year ear­lier, well be­low the 3.5 per­cent pace typ­i­cal of a healthy econ­omy.

Jeremy Beck, a lawyer in Louisville, Ken­tucky, has no­ticed a jump in his wa­ter bill and said elec­tric­ity costs were also ris­ing. But he and his wife, Chris­tine Ehrick, a pro­fes­sor at the Univer­sity of Louisville, said the big­gest prob­lem has been flat wages.

“Nei­ther of us have seen our pay in­crease much at all in the past few years,” Ehrick said.

AP PHOTO/RICHARD VO­GEL

In this March 18 photo, visi­tors ar­rive for the grand open­ing of Gib­son Santa Mon­ica, a new lux­ury apart­ment com­plex in down­town Santa Mon­ica, Calif. Residential rents, the big­gest driver of in­fla­tion in 2015, climbed 3.5 per­cent in June from a year ear­lier, the fifth straight month with an an­nual gain of that size.

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