For more than four years the Federal Reserve has been inventing new ways to print money at an unprecedented pace. Throughout this grand experiment in stimulus, the inflation hawks have blown out their voices and ruined their keyboards howling about the inflation risk and looking for the same.
You can split hairs all you want on how inflation is measured, but the Consumer Price Index (CPI) has shown little to no increase in years. The core CPI measure excludes food and energy, so let's do that for the last 12 months. Prices at the pump are the same as they were last year. Electricity is effectively unchanged, natural gas is slightly cheaper. Orange Juice has gotten cheaper, milk and bread are unchanged. The price of ground chuck is the outlier, rising 8% over the last 12 months.
If prices feel like they're going up, it's probably because wages have been so weak. Jim Paulsen, chief investment strategist at Wells Capital Management says the punk gain in wages is the new normal for this stage of the economic cycle. "This is the fourth recovery in a row now where wage inflation has continued to decline well into a recovery," Paulsen says in the attached video.
The lack of price inflation has given the FOMC a free hand to pump in stimulus. "Wage inflation declines have been the Fed's best friend," he says. If so the Fed better get ready for lonely days this year. Over the last 30 years, wage increases have bottomed anywhere between two-and-a-half to four years after the economy bottoms. The current recovery turns four early in 2013.
Once wages start rising again, and eventually they will, bond vigilantes and Fed critics will finally have something concrete to point to when they howl about the inflationary risk of cheap money. As higher wages lead to higher consumer prices, the FOMC will finally have to step back from its obsession with unemployment and worry about controlling inflation.
Only then will inflation morph from the obsession of a select few to something impacting us all.