Wages Will Be the Next Economic Flash Point

Those who forget history are condemned to repeat it. Alas, those who study history and inflict it upon others are condemned to repeat it, too, and suffer the additional burden of understanding the gruesome parallels unfolding in their lives.

Take inflation, please.

The vocabulary of the 1970s is being resurrected: stagflation, core inflation, commodity inflation, cost-push inflation and our subject here today, the wage-price spiral. Current apologists for the ongoing macroeconomic mess are congratulating themselves that while the cost of living may be rising, wages have yet to rise in recompense. This is imbecility of the first order and quite possibly the second order as well, for this means the U.S. worker, fantastically productive financial commentators included, is being impoverished. This is anything but bullish.

It also flies in the face of the work of two Nobel laureates in economics, Milton Friedman and Edmund Phelps, who studied how labor shifts its wage demands in the face of expectations about inflation, but that is a subject for another day. Let's just say the American worker is, sooner or later, going to adopt another shibboleth of the 1970s: They will be as mad as hell and won't take it anymore.

Earnings and Consumer Inflation

What has been the historic relationship between hourly earnings, announced in each month's employment situation report, and consumer inflation? Here we will use both the consumer price index and the personal consumption expenditure deflator.

Hourly Earnings and Consumer Inflation

Click here for larger image.

Source: Raw data from Bloomberg

The answer is the worst answer of all: It changes. Prior to the late 1970s, hourly earnings led the inflation measures. The U.S. workforce was both more unionized and less subject to global wage competition then, so workers had far more bargaining power then than they do today. Small wonder policy makers who cut their teeth on this history look to higher wages as a cause of inflationary pressure rather than the result of inflationary policies.

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Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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