WASHINGTON - Inflation in 2006 eased to the slowest pace in three years as consumers finally got some relief on energy and medical bills. In further good news for workers, inflation-adjusted wages rose at the fastest clip in nearly a decade.
The Labor Department reported yesterday that the Consumer Price Index climbed 2.5 percent last year, the best showing since 2003 and nearly a full percentage point lower than the 3.4 percent jump in 2005.
In the Philadelphia area, inflation fell to 3.3 percent last year from 3.6 percent in 2005.
The encouraging news stemmed from a sizable slowdown in energy costs in the second half of 2006 after 21/2 years of the price of gasoline and other fuels surging to new highs.
Also helping was a significant moderation in health-care costs. They rose 3.6 percent nationwide, the smallest annual gain since 1998. But in the Philadelphia area, the cost of medical care rose 4.1 percent last year.
Gasoline pump prices across the country rose again in December, pushing up the CPI half of a percentage point for the month. But consumers should see further relief ahead: Crude oil is now trading at a 20-month low of about $50 a barrel, down from the record in July of more than $77.
Clothing prices, which had fallen for eight consecutive years, posted a small increase of 0.9 percent in 2006. In the Philadelphia area, apparel costs rose 4.6 percent - though that was the first year-over-year increase since August 2005, the regional office of the Bureau of Labor Statistics said.
The national slowdown in price increases last year occurred as workers' wages, which have lagged in the economic recovery, gained.
That combination of lower inflation and faster wage growth translated into an increase in inflation-adjusted weekly wages of 2.1 percent for the 80 percent of the workforce in nonsupervisory positions.
The increase was the biggest gain since 1997 and followed three years in which wages, after adjusting for inflation, had fallen even as many businesses posted record profits.
Analysts attributed the improvement in real wages in 2006 to a tighter job market, forcing businesses to offer higher salaries to attract workers. They predicted further gains.
"Things have finally come together for workers after a long period of tough conditions," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pa.
Analysts say they believe companies will finance the higher wages by trimming profits rather than boosting prices.
Also yesterday, the Commerce Department said construction of new homes rose 4.5 percent in December. It was the second straight monthly gain and a signal, according to some analysts, that the worst of the housing slump may be over.
For 2006, energy prices slowed to a 2.9 percent increase after soaring 17.1 percent in 2005 and 16.6 percent in 2004 as global oil markets were roiled by Middle East tensions and heavy demand.
Also helping restrain inflation last year was the sharp slowdown in medical prices, typically one of the fastest-growing expenses for consumers. For 2006, nationwide physician charges rose 1.7 percent, the smallest increase in 57 years. Prices for prescription drugs rose 1.9 percent, the smallest gain in 33 years.
Analysts credited the move by Wal-Mart Stores Inc. to introduce a $4 generic-prescription drug program, which was matched by other big retailers, to helping hold down drug costs.