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TheStreet Open House

Hidden Inflation Slows Growth, Holds Down Wages

Stocks in this article: MCDBKWWENYUMWMT

NEW YORK ( TheStreet) -- On Thursday, Aug. 29, fast-food chain workers conducted strikes in nearly 60 cities asking that chains like McDonalds (MCD), Burger King (BKW), Wendy's (WEN) and Yum Brands (YUM) (which holds KFC and Taco Bell) boost their minimum hourly pay to $15/hour.

Meanwhile, the saga between Wal-Mart (WMT) and the D.C. City Council continues with Mayor Gray having 10 days from Aug. 30 to sign or veto legislation which requires Walmart to pay a minimum wage of $12.50/hour while other employers are only required to pay the D.C. minimum wage of $8.25/hour.

The Income Gap

In 1980, wage earnings as a percent of Gross Domestic Income (GDI, the sister concept to GDP) were 49%. In the last GDI report, they were closer to 42%. Meanwhile, corporate profits are up 50% from about 8% of GDI in 1980 to about 12% today. There is no doubt that the income gap between the rich and the middle class is growing.

The Slide in GDP Growth

The accompanying table shows the compounded annual growth rate (CAGR) of real GDP (as "officially" measured) from the bottom of each of the last four recessions to the following peak.

It is notable that the CAGR of real GDP in today's recovery (2.23%) is about half the pace of the recovery from the recession of the early '80s. Note that in each subsequent cycle since 1982, GDP's CAGR has slid more than 50 basis points.

The 'Official' CPI

In the mid-90s, it was determined that demographics would become an issue regarding the cost of social programs like Social Security and Medicare. So, the CPI formulation was changed so as to slow down the "official" rate of inflation, which, in turn, slowed the cost of the social programs.

But there was also an unintended consequence, one not recognized by any politician or the mainstream media today. Because the "official" CPI is widely accepted as "the" measure of inflation, and because "cost of living" raises for most of middle America are based on it, its manipulation over time has lowered the real incomes of wage earners (the middle class) with the resulting negative impact on the CAGR of real GDP, because if the prices of goods and services are actually rising faster than incomes, then aggregate demand is negatively impacted.

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