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Are higher inflation and falling real wages now the future for the United States?

Are higher inflation and falling real wages now the future for the United States? Mindful Money

One of the features of the credit crunch era is that we get told that things are good for us and they turn out to be harmful. Those in Greece, for example, were told that “shock and awe” and austerity would help them whereas they led to an economic collapse. The UK was told by the Bank of England that it would have disinflation (negative inflation) and falling prices and that this was such an economic evil which needed quantitative easing (QE) to prevent this.

"Without that extra spending in the economy, the MPC thought that inflation would be more likely in the medium term to undershoot the target."

What happened was quite different, as the official measure of UK consumer price inflation went above its target of 2% in December 2009 and has remained above it since. Indeed, it surged over 5% in the autumn of 2011 as the UK experienced an inflationary episode. This was something which I warned about from when I began this blog back in November 2009, as I feared that this would hurt people and have bad economic effects.

The buck has stopped, if I may put it like that, on the subject of real wages which have fallen by around 9% in the UK since the credit crunch began. Also we have seen that what are core and essential goods such as energy and food prices rise at an even faster rate so budgets particularly of the poor are being squeezed sometimes severely. Apart from the moral issue, this has meant that the stimulative effect of QE faded away and died, in my opinion.

However not everybody shares such a view. Some care is needed here because whilst my arguments on inflation include opinion, the real wage falls and rise in the price of vital goods are facts. So, let us look at the other side of the argument expressed for the United States by the New York Times:

"In Fed and Out, Many Now Think Inflation Helps"

Those in the UK suffering from the real wage and cost of living crisis may wonder exactly who it helps! Well we do get some examples:
"Retailers including Costco and Walmart are hoping for higher inflation to increase profits.

"The federal government expects inflation to ease the burden of its debts [...]

"Executives at Walmart, Rent-A-Center and Spartan Stores, a Michigan grocery chain, have similarly bemoaned the lack of inflation in recent months."

This looks rather like an argument for the 1% - or rather the 0.1%. I would like to emphasize this by looking at its claim to help the ordinary person - or, as it might be put in the US, Joe or indeed Jill six-pack.


Firstly we are promised good news:
"Rising wages help borrowers repay debts."

Except we have a catch - that the UK experience has seen wages fall in real terms because above-target inflation has exceeded wage growth. Indeed, the latest overall wage growth figures are only 0.7% per annum, which reinforces the fact that, in the UK, an inflationary episode has been associated with LOWER - not higher - wage growth. On that road (squeezed incomes due to inflation in essential items) means that the whole sentence quoted may not be true either as debts remain high compared to income after essential purchases.

Actually the 'rising wages' argument seems to hit something of a road block later in the article. The emphasis is mine.

"Rising prices allows companies to increase profit margins quietly, by not raising wages."

Hang on a minute! They were rising on the previous page, so is up the new down again? If they can rise for workers and fall for companies I would love it, but ahem…

If we see what is happening to US teachers in Anchorage, we get a guide as to what is really meant I believe.

"The final deal, completed last month, gives the teachers raises of 1 percent in each of the next three years [...]

"Teachers, while not thrilled, described the deal as better than a pay cut. But it is likely, in effect, to cut the teachers’ pay. Economists expect prices to rise about 2 percent a year over the next three years, so even as the teachers take home more dollars, those dollars would have less value."

That sounds very familiar to UK eyes and ears as it is exactly the sort of situation which has led us to the real wage crisis and the cost of living crisis. What will happen to the real wages of these people if those who desire inflation get what they wish?
"In June, Caterpillar, the industrial equipment maker, persuaded several hundred workers at a Wisconsin factory to accept a six-year wage freeze."

How much inflation is prescribed?

An article by Professor Kenneth Rogoff is quoted which raises a smile as those pushing it are usually quick to denounce his work on national debt to GDP ratios (90%) - but, I guess, any port in a storm! Here are his views:
"Moderate inflation would have been extremely helpful."

"Perhaps the case for moderate inflation (say, 4-6% annually) is not so compelling as it was at the outset of the crisis, when I first raised the issue."

Perhaps no-one has ever told him that governments issue inflation-linked debt these days! But if we look at his prescription for Europe, we see that there is a familiar group of beneficiaries - the emphasis is mine:
"But higher inflation would help to accelerate desperately needed adjustment in Europe’s commercial banks."

So, Professor Rogoff is not as keen as he was and I suspect a few trips to the UK which has got close to taking a full dose of his medicine would cure him of his views.

Does the United States need this medicine?

The situation regarding wages looks better there than the relatively inflation-ridden UK. For example, according to the US Bureau of Labor Statistics, average private-sector weekly earnings rose in the year to September by slightly over 2%. As the official measure of consumer inflation is rising at 1.5% there are small real wage gains too.

If we now look at the UK and compare on a like for like basis, we can we see this:

"Average weekly earnings for the private sector increased by 1.1%"

With consumer price inflation at either 2.7% (CPI) or 3.2% (RPI), real wages are falling still -and remember, this is the world that those who prescribe inflation as a cure for all our ills want! Who thinks that such a policy will be better for them?

Yet you are being told it will be…


This article was drawn to my attention by a former member of the UK Monetary Policy Committee Adam Posen who described it thus on Twitter:

Good article by @BCAppelbaum on how a little more inflation than near zero helps many (but not all) people

To which I replied this:

The UK record is that “a little more inflation” has hurt people and contributed to a fall in real wages.

To which he replied:

Not versus the alternative of further contraction, and not net of what austerity and euro area did to wages

You may note that these are straw(wo)man arguments rather than a reply. Those who recall the Bank of England using the word 'counterfactual' to defend things not turning out as promised will find such a response familiar to say the least!

Adam Posen has a record on inflation control from his time at the Bank of England. From the Guardian on the 27th of March 2011:

"The Bank of England’s leading dove has predicted that inflation will tumble to 1.5% by the middle of next year (2012)."

It did not and, with official inflation at 2.7%, we are still waiting. Although, it is also right to point out that Adam Posen did also live up to this bit:
"If I have made the wrong call, not only will I switch my vote, I would not pursue a second term."

Although his continuing apparent enthusiasm for inflation needs to be reflected in a prism of his own words:
"They should have somebody who gets it right and not me."

So readers in the United States will do well, in my opinion, to review who will do well from the burst of inflation that is being prescribed for them. Also as to whether it can be controlled as promised. As ever, big business, government and banks will make gains, but in my view that will be at the expense of the ordinary citizen (or Joe and Jill six-pack). As we stand, I would argue that elements of the position in the US such as real wages look better than in the UK.

Also let me add that savers, pensioners and those on fixed-incomes would get a real kick in the teeth from such measures. How many times do they think that they can repeat the same trick? Like a pony, do they only have one trick?

This article was written by Shaun Richards and was originally published in MindfulMoney under the title Are higher inflation and falling real wages now the future for the United States?

Tags: Adam Posen , Bank of England , cost of living , disinflation , Greece , inflation , Kenneth Rogoff , monetary policy committee , MPC , quantitative easing , real wage , UK , US Federal Reserve , wage inflation
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