Inflation is no good for the average consumer

By Duru

April 29, 2004


I keep hearing the Fed and others claim how a little inflation is a good thing because it signals improved pricing power by corporations. Today, inflation came in higher than expected, and the market predictably went into a selling panic due to the spectre of higher interest rates. So, we must ask, why is the Fed looking forward to a little inflation (or as Greenie euphemistically puts it, a lack of deflation)?

It seems to be that after 3 quarters or more of bang out profits, America's companies have all the pricing power they need. If they do even better by raising the prices of the things we buy, then how do WE benefit? Well, the way things are supposed to work is that this increased pricing power gets translated into higher wages as our generous benefactors plow their profits back into our happiness. What a noble thought indeed. Our wages have generally been in a standstill while corporate coffers overflow and somehow the largess will finally trickle our way just as inflation is going up?

So, let's see, if inflation runs an annualized 5%, I need at least a 5% increase in wages to stay even. I need to demand more to get ahead. But if I ask for more, my company will feel compelled to charge more (after all, they have pricing power - dollar bills…activate!). And when those prices go up, I will again demand more pay again. This cycle only ends when the supply of labor is sufficient to make me too scared to keep asking for more (pretty similar to the position we are in now). And as inflation spirals upward, interest rates go up to try to keep up. Great! I can earn more money on cash and forget about this crazy thing called the stock market. But I have so much debt and so little savings that I get little benefit there either. My ONE saving grace is that my debt is mostly a mortgage locked in at fixed rates and as inflation spirals upward, my home loan becomes less and less of a burden to service. Never mind that real estate has so outstripped my meager wage growth that not even I could afford to buy my own home if I was forced to start over.

I created this little melodrama just to caution us to take inflation seriously when it finally starts to make a real presence. With the Fed gearing up to jack up rates, the economy will largely be on its own to sustain its growth for the first time in a while. Let us hope all the scooting in the walker has prepared us for the real thing. Otherwise, we will have to outsource more jobs and ship more from overseas in a scramble to keep a lid on costs (which would presumably cap prices).

Be careful out there!


Ó DrDuru, 2004