Saturday, August 24, 2013

The Hidden Inflation

The Federal Reserve assures us that inflation is modest, and can point to measures of inflation it prefers (the PCE price index) or doesn't prefer (the CPI), both of which tend to be modest--in the 2% range or less.  But if you ask a lot of people out in the real world, they'll tell you inflation is worse than that.  And they are right, once you take account of what inflation really means.

The ultimate problem created by inflation comes up when price increases exceed income increases.  If your real income is falling, your standard of living will drop.  That's cause for concern.  When incomes rise faster than price increases, people complain but then dig into their steaks and lobster. 

Incomes today are, in real terms, falling for a lot of people.  Workers on average earn less, net of price inflation: see and  Median household incomes have fallen since the beginning of the Great Recession:  While the fall in household income may in part be due to higher unemployment, it would also reflect the drop in worker earnings. 

Once you look at earnings and household incomes, you can see that inflation in the broader sense isn't so modest.  Since the Great Recession began in 2009, government statistics show that real average weekly pay for full-time workers has fallen 3.5% from 2009 to the second quarter of 2013.  (See  The social discord and turmoil that can come from inflation is rooted in falling real incomes, not nominal price increases.  Despite all the statistical soothing the Fed may offer, many Americans today are hurting from this hidden inflation. 

There is little the Fed can do about falling real incomes.  Its monetary tools and bond purchases have little connection to wage and salary levels.  They may boost household income to the extent they promote greater employment.  However, because they significantly reduce interest income for savers, they may also exacerbate the problem of falling incomes. 

As for Congress and the Administration, they're on August recess right now.  And they won't do much about this problem when they get back.  Fights over a budget for the next federal fiscal year (beginning Oct. 1, 2013) and the looming debt ceiling will provide photo ops and Sunday morning talk show invites for the high and the mighty.  The dreariness of ordinary life is likely to get lost in the shuffle.  Talk at the state level about raising the minimum wage may have some impact.  But falling incomes is as much a problem of the middle class as of lower income persons.  Minimum wage laws won't help the middle class very much. 

The overall structure of American society, with its exceedingly generous corporate compensation practices to tax laws favoring the 1% to the decreasing degree of upward social mobility to the astonishing growth in the cost of college educations and more, is thinning out and pushing down the middle class.  No nation has gone on to its greatest days with increased social stratification and top-heavy distribution of wealth.  But nothing is happening right now to change the trend.  This story won't end well.

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