Inflation In Sept. Highest Since '80

The size of the annual COLA is based on the change in a variation of the CPI over the federal fiscal year, which ended Sept. 30.

But most U.S. workers don't get automatic cost-of-living adjustments to their pay. After taking inflation into account, average weekly wages for production and non-managerial workers -- who make up more than 80 percent of the workforce -- fell 1.2 percent last month, the Labor Department said in a separate report. Those earnings bought 2.7 percent less than they did a year earlier, after adjusting for price increases.

The figures released yesterday revealed the steepest annual decline in average hourly and weekly wages, adjusted for inflation, since the early 1990s, said Jared Bernstein, senior economist at the Economic Policy Institute.

"We are in the midst of a protracted wage slump," Bernstein said, noting that pay increases are not pushing up inflation now as they did in past decades.

In the 1970s, when more workers belonged to unions and had COLA clauses in their contracts, higher oil prices did cause wages to rise, which propelled more price increases. But since the early 1980s, there has been "no evidence of pass-through" from energy prices to prices other than those for food and energy, Janet L. Yellen, president of the Federal Reserve Bank of San Francisco, said in a recent speech.

"Unacceptably high inflation remains just a risk, not the most likely outcome," she said.

So far, most businesses are not passing on their energy costs by raising other prices, the CPI report showed. The so-called core-CPI, which excludes food and energy prices, rose just 0.1 percent for the month and 2 percent over the past year.

Prices rose in September for food, housing, medical care, new cars and education, while declining for clothing, hotel rooms, personal computers and rental housing.

But several companies, including consumer-product giants Clorox Co., Procter & Gamble Co. and Kimberly-Clark Corp., have announced plans to raise prices next year, Yamarone said.

And consumer expectations of future inflation rose again this month, the University of Michigan reported yesterday. Fed policymakers worry that higher inflation expectations might cause shoppers to accept higher prices, allowing them to take off.

The Fed cannot "let the inflation virus infect the blood supply and poison the system," Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said in a speech last week.

Fed officials have said they probably will keep raising interest rates in coming months to keep inflation down. Higher rates dampen borrowing and spending, slowing economic growth and making it harder for businesses to raise prices.

The central bank raised its benchmark short-term rate to 3.75 percent last month. Fed officials have not said how high the rate will go, but many analysts and investors think it will rise to around 4.5 percent early next year.

Yamarone said he doesn't think inflation will rise out of control. But, he said, "if we have a very cold winter, we're in for very stormy economic times."