I am beginning to lean toward the idea of a gathering inflation storm. Or at least increased upwards pressure on prices. While I have always been a hawk on inflation, the idea of keeping our money sound may not be the be-all-and-end-all for prosperity in the US, or the globe.
One apparent reason is laying the blame for inflation largely at the feet of labor costs. No component of the price indexes watched by the Fed is more closely monitored than labor costs. When they begin to rise, the Fed usually acts to slow the economy.
The trouble is real wage growth - getting a raise, for example - is described as an increased labor cost, not a worker income boost. The governments not-so-subtle point of view bias is in favor of business owners - not business workers. This is the unwritten message of the "ownership society". While it sounds admirable and works for me, the quiet truth is if allowed to come to full fruition, passive returns from owning "things" (houses are a good example) will be how most wealth is accumulated, not by working.
The result is for most Americans, our government is trying really hard to make sure you don't get ahead. To be sure, this is not done deliberately (I think) but dispassionately to protect the value of money.
To begin with, I'm not sure this emphasis on labor costs is warranted. I'm not alone.
No matter what standard econometric models might suggest, the empirical cyclical evidence indicates that labor cost inflation is not a consistent predictor of cyclical upturns in inflation. In fact, a fair amount of asymmetry exists in the cyclical behavior of the growth rates of the ECI, AHE, and ULC when compared with inflation cycles. All three series lead consumer price inflation at peaks, and lag it at troughs. [More]One problem is when you have some factors you can measure easily and accurately, and some you can't (like the effect of immigrant labor) you zero in on those you can see.
One thing that is certain, is this focus on control of labor costs has coincided with stagnant wage growth for the vast majority of Americans.
Wages have been flat or declining on average for 5 years now. As the Financial Times story points out, we have had 5 years of economic growth, but the amount the median American worker earns every week has fallen by 3.2 per cent, adjusted for inflation, since the start of the recovery in November 2001. For the first time ever, the real wages of American workers have declined through more than four years of strong growth. Calculations by NDN show that the average American earned $480 a week when President Bush came to office. Controlling for rising prices, the average American still earns exactly $480 today. So while the American economy has been growing, the incomes of most Americans have been standing still. [More]
I think this is the reason that good unemployment numbers don't generate the political enthusiasm that Republicans especially expect. No matter what the economy's overall performance is like, life at the individual level for most has not been all that exciting.
There is much more to this issue of course, and I will be trying to wrap my mind around it in the January issue of Top Producer, but for now contemplate this:
If rapid wage growth is inflationary, why isn't rapid profit growth? In other words, why is the return to capital a good thing and the return to labor a negative influence? Aren't more dollars chasing limited goods and services equal regardless of their source?
I'll be working on that one...