Thursday, August 21, 2008

Prices Rise and Credit Contracts: Is the Recession Here?

by Amy Lillard

Inflation rose in July to the sharpest price increases in 17 years.

Consumer prices rose 0.8 percent on a seasonally adjusted basis from June to July, according to a government report (Consumer Price Index) released today. This is the third consecutive month of inflation, and during the last 12 months prices have risen 5.6 percent.

Driving the price increases are continuing surges in energy and food costs. Energy prices increased 4 percent over the month, while food prices rose 1.2 percent.

The reported figures coincide with consumers cutting back and employment getting squeezed. Core inflation, removing food and energy costs, rose 2.5 percent in the last 12 months, and reaching the levels federal policymakers consider unacceptable. The inflation is causing worker spending power to drop dramatically to rates last seen in 1990. Although average hourly pay rose during the last month, inflation and a cut in average hours means a reduction in real weekly earnings by 0.8 percent. During the last 12 months, real earnings dropped 3.1 percent.

Accompanying the consumer price report was another indication of continuing housing market woes. Existing U.S. home sales fell 16 percent in the second quarter, a 10-year low, according to reports released this week. At the same time, median prices for a single-family house dropped 7.6 percent, from $223,500 to $206,500 over a year period.

A third of all sales in the quarter were foreclosures, with bank seizures of properties in default rising 184 percent in July. Put another way, more than 272,000 properties, one in 464 U.S. households, were in some stage of foreclosure. The increasing foreclosures are depressing home prices further.

For those looking to buy, banks are making it harder to borrow money, with tighter lending standards and terms, according to a survey by Bloomberg. The tight funds extend also to small businesses and credit card loans.

With consumer prices rising, fixed mortgage rates at a six-year high, and a tightening credit crunch, the recession seems to be imminent, or already here.

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