Shocker: Inflation is back, wages falling behind

posted at 9:30 am on April 5, 2011 by Ed Morrissey

During the campaign in 2007-8 and just about ever since taking office, Barack Obama has attempted to disparage the boom years between 2003-7 as an unfair illusion, arguing that middle-class families didn’t experience real wage gains while the rich profited.  One has to conveniently forget the millions of jobs created in this period to believe that, but the issue is moot anyway. As the Washington Post reports this morning, inflation has returned as wages fail to keep pace, which will have families pining for the days of the Bush expansion:

Inflation is back, with higher prices for food and fuel hammering American consumers, and this time it really hurts.

It’s not just that prices are rising — it’s that wages aren’t.

Previous bouts of inflation have usually meant a wage-price spiral, as pay and prices chase each other ever upward. But now paychecks are falling further and further behind. In the past three months, consumer prices have been rising at a 5.7 percent annual rate while average weekly wages have barely budged, increasing at an annual rate of only 1.3 percent.

And the particular prices that are rising are for products that people encounter most frequently in their daily lives and have the least flexibility to avoid. For the most part, it’s not computers and cars that are getting more expensive, it’s gasoline, which is up 19 percent in the past year, ground beef, up 10 percent, and butter, up 23 percent.

What a surprise!  Who could have predicted this?  Well, Sarah Palin for one, who predicted it last fall and got a round of laughter from the media for her insight.  Palin warned that the weakening of the dollar through the Fed’s second round of quantitative easing would create an inflationary pressure that would hit families hardest.

In this case, the culprit is mainly fuel prices.  Last month, prices shot up faster than any time in the past 36 years, thanks to a spooked spot market and widespread unrest across the oil-producing nations.  Palin and plenty of others have also warned about this in relation to America’s energy policy and the obstruction of domestic production.  Energy costs are multipliers in the distribution chain, as prices rise at every stop because of the added costs of transport.

The Post tries to push the blame onto a burgeoning world economy:

As people in poor nations become wealthier, they develop middle-class tastes. They wish to eat more beef instead of just rice, for example, and drive cars rather than bicycles. Those rising living standards in developing nations have left suppliers struggling to grow enough feed grain, mine enough iron and pump enough oil to keep prices near the lower levels of recent decades.

The resulting rise in prices likely reflects a long-term trend, separate from the routine ups and downs that are traditional for oil and other commodities. That, in turn, means that prices could be rising faster than Americans’ incomes for some time to come.

That might be true if the global economy was strong and growing, but that hasn’t been the case for at least three years.  In effect, the Post blames supposedly higher demand in a weak economy and lack of production capability during a period of high unemployment.  It’s a convoluted way to avoid the obvious conclusion, which is that a 40%+ increase in fuel costs in a few weeks’ time has created inflation while labor markets remain soft.  It’s the same exact problem we faced in the 1970s, when (not coincidentally) we refused to drill our own oil to meet our own energy demands, while at the same time wasted years on neo-Keynesian policies that exacerbated rather than eased our economic woes.

If we want to keep inflation under control, we have to produce more of our own energy and buffer ourselves from the political tribulations in unstable oil-exporting nations.  That will also add hundreds of thousands of good-paying jobs to our own economy while allowing businesses the kind of stability they need to invest in America.  Instead, we’re now singing “Welcome Back” to the 1970s.


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