The Street Gets Inflation Threat Backwards

Except, of course, wages. They are flat to slightly higher over the past five years. In real (i.e., inflation-adjusted) terms, they are actually negative.

Wrong Way Corrigan

Part of the reason the majority is wrong about inflation owes to the fixation on core CPI. Removing a volatile component from a single month is sensible when an event gives cause.

A perfect example: Hurricanes Katrina and Rita distorted the data for a few months. That would have been a perfectly valid excuse to report the core rate ex-energy, because of the short-lived reaction to events in the Gulf.

However, one has to wonder just what is going on the brains of those who insist on ignoring the situation when the volatility is in but one direction. With the the CRB index trending upward for 51 consecutive months, the ongoing reporting of inflation ex-inflation is nothing short of idiocy.

I suspect the other source of error is laziness. Many people read the headlines but do not delve into the (boring) details beneath. So let's review the recent data trilogy and see if we can determine whether wage inflation is real or imagined.

Unemployment Rate

Anytime there is a large and unexpected shift in the unemployment rate, it behooves us to look more closely at the data. The recent drop to a 4.7% unemployment rate did not disappoint.

What we find is not a sudden -- and inflationary -- upsurge in hiring; rather, it was instead more of the a drop in the labor participation rate. As the Bureau of Labor Statistics (BLS) reported, while the overall population grew in January, the civilian labor force itself got smaller.

With his permission, I used the terrifically instructive charts from a recent commentary by Northern Trust's Paul Kasriel, and then annotated them.

Participation Rate Unemployment Rate