The issue is wages, not inflation

Chris Farrell Aug 21, 2008

The issue is wages, not inflation

Chris Farrell Aug 21, 2008


Bob Moon: Rebounding oil prices are rekindling worries about inflation. The price of crude is back above $116 a barrel. And still, our economics editor Chris Farrell is holding out hope that the cost of living will remain in check. What he’s most worried about now is whether the floor is dropping out from under American wage-earners. Good morning, Chris.

Chris Farrell: Hi, how you doing?

Moon: Good, thanks. So, I had to get you back here to follow up on something we chatted about a month ago. Let me remind you that you said you’re not so sure we need to worry about inflation. Well this week, we’ve got wholesale inflation jumping at the fastest pace in 27 years. So what do you say, Chris — are you having nasty flashbacks to the 80’s, or do you stand by that earlier assessment?

Farrell: Oh, I stand by that earlier assessment. Now, it’s a scary number, but we live in a service sector economy. Guess what service sector inflation has been running?

Moon: Haha, it’s gonna be smaller, I’m sure.

Farrell: It’s gonna be very small — four-tenths of a percent. So what you’re really seeing is the impact of higher energy and food prices, I mean what we’ve been talking about a lot. But if you look at the two things that really matter, service sector inflation, it’s down. And by the way, wages, they’re also down.

Moon: OK, look — after we spoke a month ago, we got some pretty strong reactions posted on our Web site. Let me read you just a little bit, a few of them here: “If you take out food and energy costs, you still have 2.4 percent inflation. Meanwhile, the average pay increase is 3.4 percent, and most people still like the occasional bite to eat and a warm place to sleep between shifts.” I think I read that as sarcasm, Chris.

Farrell: Hahaha, I think it is. And this is one of those things where you take the headline inflation and consumer price inflation and you take out food and energy, and if you’re an American, what else is there?

Moon: What I think I heard you saying just a moment ago, though, is that maybe the emphasis shouldn’t be on inflation so much, but on wages.

Farrell: It should be on wages. That same report — why aren’t people worrying about the decline in wages that is the biggest decline since 1990? So what’s happening to people is that they have less money at the end of the month. They’re paying more for fuel, they’re paying more for food, they’re not getting wage increases, their health care costs are going up. That’s not inflation, that just means their budgets are shrinking.

Moon: Aren’t you goring your own ox here, though, by suggesting that wages go up? That’s just going to promote inflation, right?

Farrell: Haha, what I’m hoping is that I’m right on inflation, because if I am right on inflation and we get continued decline in some commodity prices, a little bit of relief their, then hopefully wages adjusted for inflation start to grow again. And all these cries that the Fed has been weak and weak-kneed in the face of inflation and hasn’t taken the tough action, that’s wrong. It is really wrong.

Moon: Our economics editor Chris Farrell arguing for the best of all worlds here. Thank you, Chris.

Farrell: Haha! I try.

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