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Low wages partly to blame for stagnant inflation rates

Kimberly Adams Sep 16, 2015
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Wednesday is the first day of the two-day meeting of the Federal Open Market Committee. And Thursday, we’ll know if the central bank will raise interest rates, which have been near zero since the financial crisis.

The latest piece of data that the Fed can incorporate into its decision-making came this morning, courtesy of the Labor Department, which said consumer prices fell unexpectedly in August. Consumer prices have a lot to do with inflation, which the Fed would like to see steady at around 2 percent. That is a tall order, in part because of things well outside the Fed’s control, like global commodity prices. Think: oil and food. But in part it’s because of things playing out inside the U.S. economy. Think: wages and jobs.

David Madland, the managing director for economic policy at the Center for American Progress, says those two things aren’t really moving, especially at the lower end of the economic scale. The “gig” economy and the masses of underemployed are making it harder for workers to get better pay.

“And that’s a real problem for the future of our economy,” says Madland, “because if the middle class and most workers don’t have money in their pockets, there’s not going to be enough demand to drive the economy forward.”

And consumer demand is changing as well, according to Diane Lim, vice president of economic research at the Committee for Economic Development. She says millennials and baby boomers don’t work  or spend in the same way people used to.

“The economy is moving from really a goods-oriented economy to one of consuming experiences,” she says. “There are a lot of things that are less valued in dollar terms. And what that means is there’s less of a market signal as to the worth of activities.”

That makes it difficult to tell if the way we calculate inflation is really capturing consumer demand.

Plus, that goal the Federal Reserve has for inflation is kind of arbitrary, says Josh Bivens, research and policy director at the Economic Policy Institute.

“It’s just sort of a fudge,” he says. “It’s basically, we want a measure of quite low inflation, we’ll just say 2 percent.”

Because even if, theoretically, economists want zero inflation, that flirts a little too closely with deflation, which nobody wants.

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