Funny how it takes a survey to confirm what any reader of the press ought to know right now: consumers, hit by rising fuel and food prices, expect a higher level of inflation for the next 12 months (5.2%, according to a Reuters/University of Michigan survey):
One of the things that has led the Fed to take signs of rising inflation less seriously than it otherwise might is the lack of worker bargaining power. The 1970s witnesses so-called cost-push inflation, where rising prices led workers to demand and get corresponding wage increases, which then fed more price hikes. That hasn’t happened yet, but a Wall Street Journal story suggests that might be starting to change:
“Parking is going up, gas is going up, food is going up … but the wages aren’t going up,” said Jan Cornell, president of a union that represents 400 workers at the University of Virginia in Charlottesville. The union is seeking a wage increase.
But with unions comparatively scarce, it isn’t clear by what mechanism beleaguered and insecure employees can extract better pay. And note that you don’t need inflation for workers to suffer falling real compensation. Look at the trends in Japan:
Observe also when the change occurred, aroung 1998, when the countries that either suffered in the emerging markets crisis or managed to escape (China) vowed never to be at the mercy of the IMF. Their remedy was currency pegs against the dollar. Japan has managed to have high trade surpluses even post 1998, but at the expense of domestic pay packages.
So far, even though corporate profits have been at a record percentage of GDP (see here and here), some large companies, are trying to contain price increases by sacrificing margins, while others are passing them through:
Some companies, after initially trying to absorb increased energy costs, are passing them along to customers. Wednesday, Dow Chemical Co. said it plans to raise prices on its products as much as 20% to offset “staggering” energy costs. The company joins Kimberly-Clark Corp., which is raising prices on goods including toilet paper, diapers, and paper towels for the second time this year. Others lifting prices include tire maker Michelin North America, Kraft Foods Inc., and several retail jewelers.
While restraint on price increases may for a time reduce the pace at which cost increases move through the economy, at some point businesses will reach the limits of their willingness to absorb expense increases.
Woe is the salaried worker
What is the ideal alternative? Pegging salary rates to living standards via some inflation-included representational basket of goods linked to different consumption levels?
foesskewered: the ideal alternative, as per luminaries such as Mozilla of Countrywide, Paulsen of Treasury, Bernanke of the Fed and others too numerous to mention, is financial innovation that promotes the availability of credit through the magic of risk shifting. There was a time when we incurred the dangers of cost-push inflation in pursuit of wages and jobs. No longer. Now we have magical financial innovation. We no longer need to worry about wages. Instead, we only need to worry about the availability of credit. Its no longer a world of save and invest. Its a world of borrow and spend.
Sure, some folks take this too far. But we’ve got bankruptcy laws now that protect the rights of lenders so that they can safely plan on reaping their 30% interest and fee rates from people who, because they have no wage increases and are subject to episodic unemployment, medical problems that are uninsured, and other such things, find themselves strapped to repay. Thankfully, Congress has seen the wisdom of our new ‘credit for everyone; jobs and wages for none’ and protected the top 1% from such deadbeats.
And, of course, there’s the media who never fail to see the immorality of dead beat borrowers who ‘should have known better’. Moral hazard is a terrible thing among the jobless and wageless. It doesn’t exist on the lending side because, without the Fed bailing out every I-bank, hedge fund, commercial bank and other capital market player, all those people who work so hard will find themselves unemployed.
As far as the Fed is concerned, the only real inflation is wage inflation. Food and energy inflation can be safely ignored along with most other commodity inflation, and even finished goods inflation will likely be marginalized as only a minor concern and attributed to exchange rate fluctuations and conditions in specific industries. Asset price inflation is generally considered a positive because of the wealth effect, so long as it doesn’t lead to a bubble (and the Fed isn’t even all that concerned about bubbles). Only wage inflation is “true” inflation deserving of restrictive monetary policy in the Fed’s eyes. This is quite scary since most of the classical economists considered the very definition of _prosperity_ to be situations where goods were cheap and labor expensive.
“What is the ideal alternative?”
Americans (and Brits and a lot of other Westerners) will be getting, on the whole, poorer. They will need to do with less and consumer less. The main question is how this should be spread out.
I would suggest higher taxes on things other than necessities (such as food, clothing costing a certain amount,…) in order to impact consumption most on items where society can consume less.
Ah, like I have said the FEDs policy of inflation to help RE will never work because US workers have no wage power since the busting of the unions. In other countries inflated housing becomes available when salaries become inflated. This will not happen in the US. What we would have here is same wages, higher inflation and higher long term interest.