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July 12, 2018

Who Pays for the Price of Inflation?


Inflation “looks quite good,” Chicago Fed President Charles Evans said so eloquently in an interview even before today’s Consumer Price Index was released.
Today, by his standards, inflation looks even better. In June, the Consumer Price Index for all urban consumers rose a brisk 2.9% compared to a year ago, the sharpest increase since February 2012:


Without the volatile food and energy groups, which weigh about 21% in the index, “core” CPI rose 2.2% in June compared to a year ago.

And the purchasing power of the dollar – which the Bureau of Labor Statistics also provides as a helpful reminder of what consumer price inflation actually is – dropped 2.7% from a year ago. In May and June, the dollar’s purchasing power reached, as it just about always does, a new record low. The chart below shows what the purchasing power of the dollar has been doing over the past decade:


Inflation is good for companies and landlords because it means they’re raising prices and rents, and they can report higher revenues without having sold a single extra thing. Their input costs may also rise, but they’re hoping that those increases will be less, and that in this manner, inflation will inflate their earnings. For that reason, they and their Wall Street hype jockeys love consumer price inflation. But they hate wage inflation because it eats into the hard-earned inflation profits. And the Fed has been trying to help out.

So the question arises: Who is paying for this inflation that the Fed has been strenuously trying to obtain over the last few years and that it now has obtained to the satisfaction of even its doves, such as aforementioned Mr. Evans?

Average hourly earnings for all employees in the private sector in June, according to the Bureau of Labor Statistics, rose 2.7% from a year ago. This was at the upper end of the miserably slow growth range that has prevailed since 2010. The range peaked at a year-over-year increase of 2.8% in September 2017 and bottomed out with an increase of 1.5% in October 2012. It doesn’t take much inflation – however inflation is measured – to turn these feeble nominal wage increases into real-wage declines.

And this is precisely what happened in June. Mr. Evan should be pleased.

The nominal wage-increase of 2.74% was more than eaten up by inflation as measured by CPI of 2.87%: Real wages fell by 0.13% from a year ago. Workers pay for consumer price inflation:



Wage inflation, if it were allowed to exist, could more than compensate workers for consumer price inflation. Wage inflation would also help consumers pay off their debts. But wage inflation is precisely what the Fed fears the most.

The Fed understands that declining real wages, if they decline long enough, will eat into consumption in a consumption-based economy, and will further diminish consumers’ ability to pay credit card debts, auto loans, and the like, in a credit-dependent economy. Hence the Fed’s mixed feelings about consumer price inflation: If it gets just a little too high, it triggers broader effects that might turn the corporate party into a mess. And in this manner, today’s data will embolden even the doves to nudge interest rates up further.

Courtesy of Wolf Richter via Wolf Street ( (More from Wolf Street here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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