WASHINGTON - While hiring and factory production rose last month despite higher prices for food and gas, the pricing trend has led some economists to lower their growth forecasts for the first quarter, the Associated Press reports.
Consumer prices rose 0.5 percent last month, the Labor Department announced last week, with nearly all of the gains coming from more expensive gas and food.
When eliminating those categories, core inflation was relatively flat. However, employees have only been seeing small, if any, pay increases.
"People have less money to spend on goods other than food and energy and that is going to cause the expansion to slow," said economist Joel Naroff of Naroff Economic Advisors.
How big the overall economic impact gas and food prices will cause is "the critical question," said the Associated Press. If food prices fall and oil prices stabilize by summer, with companies continuing to create jobs, consumer spending will increase quicker, which would give the economy a boost by fall.
Some retailers are not taking any chances and have begun cutting their fall orders, fearing that consumers will have less to spend. Kohl??s, for instance, has cut orders by more than 10 percent.
Clothing prices fell 0.5 percent in March, the second straight monthly decline. However, they are expected to increase in the coming months to offset higher labor and material costs.
"I think the biggest challenge is not just the price of our...apparel products," said Blake Jorgensen, CFO of Levi Strauss & Co. "It's trying to understand consumers' reaction to (all) price increases...No one's quite sure as to what the ultimate impact (on) the consumer will be."
Stagnant wages make it more difficult for consumers to pay higher prices, which is why the Fed believes a spike in gas and food prices will have only a modest impact on inflation.
A separate report last week revealed hourly earnings for employees, adjusted for inflation, fell one percent in the past year. And retailers find it difficult to pass along the higher costs to their customers.
"The only good news for consumers is that there is terrifically fierce competition among the major discounters like Costco, Target and Wal-Mart," said Craig Johnson, president of Customer Growth Partners.