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October 28, 2005
A reader trying to figure the direction of inflation, Fri., Oct. 28, 2005, 10:48 AM
"Bill, I'd like to get a better understanding of inflation. We all know that energy prices are driving up commodity costs and input costs of items that we purchase. But as the economy slows due to liquidity being drained by the Fed's tightening and by the long bond rising, will some of these cost pressures ease? Also, there doesn't seem to be a lot of upward pressure on wages. Although retirees will soon receive a 4% + increase in their social security, non-union workers are lucky to get a 2-3% annual merit increase. And Union workers are facing heavy pressure to give up wage and benefit concessions. Also, we still have quite a bit of outsourcing to lower cost nations (i.e. India and China). With all things considered, is inflation just a short-term problem? /Carnie"
Carnie, it sounds like you trust the data that was published this morning by Washington, and touted on CNBC. Whether or not that's the case is not important. You do ask a good question.
Do you think in your company (which I gather happens to be a large one that sells business software), and in the companies you sell products and services to, that the total COL/merit wage increases have averaged +2.3 pct this year? Your property taxes, your healthcare, your kid's education, you name it... have increased a lot more than +2.3 pct. So too has the total cost to operate your car, and so forth. And interest rates (mortgages, credit card rates, bank loan rates...) and insurance costs are going up fast too. I only wish they were going up +2.3 pct per year.
So, I ask again if the COL/merit increases in your company and in the companies you sell products and services to are going to stay at or below +2.3 pct per year. Or do you think the bottom of the long-term inflation cycle has been reached in the past two years and that the cycle is now headed higher?
What I am really saying is that this is not a question to ask of me, but one that all of us have to ask of ourselves. We are not statistics in a dubious govt database; we are the real world.
People cannot live on +2.3 pct annual wage increases, if their real world costs are rising much faster. Sooner or later, there will be significant wage-push inflation.
Hope that helps. Cordially, /Bill
Posted by Posted by Bill Cara on October 28, 2005 10:48:54 AM | Category: Economics