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Wages not keeping up with pace of inflation
Fed’s index omits food and energy
The sputtering growth in wages is one symptom of a weak job market. The highest unemployment rate in a generation has left workers with little leverage to ask for raises.
The rise in prices, by contrast, owes more to global developments, including dwindling global reserves of oil and the rapid rise of a new class of middle-class consumers in heavily populated China and India, which are competing for the world’s scarce stores of food and fuel.
The Fed has driven down interest rates and pumped trillions of dollars into the economy in the past three years in a monumental effort to revive the flagging U.S. job market, and its efforts eventually should lead to stronger wage gains.
Fed Chairman Ben S. Bernanke points out that as long as wages and labor costs remain depressed, there is little chance of an inflation spiral in the U.S. economy. Labor constitutes about two-third of business costs, and the low levels of wages have enabled many employers to avoid raising prices.
Still, the vexing rise in consumer prices this year has revived the debate over inflation within the Fed. Some presidents of the Fed’s reserve banks have argued that the central bank must be vigilant against the threat of inflation and move toward a tighter monetary policy this year.
But other Fed governors contend that the surge in oil prices arising from unrest in the Middle East also has the potential to weaken the economy, counteracting the inflationary effect.
Critics of the Fed say the central bank inadvertently set off the inflation spiral with its loose-money policies, which sent the dollar plummeting and led to the spiral in commodities, which while traded in global markets are all priced in U.S. dollars.
Compounding the error, the Fed’s focus on “core” inflation — excluding food and energy — has enabled the central bank to ignore a persistent rise in “headline” inflation, which has stayed ahead of the Fed’s preferred measure for most of the past decade, said Michael Pento, a senior economist at Euro Pacific Capital.
With the dollar dropping more than 20 percent against other currencies since 2000, “the sad truth is that the Fed’s record low interest rates are once again causing food and energy prices to rise much faster than core items,” causing angst for consumers, he said.
“Once a central bank goes down the expansionary path to fight recession, it is much easier to keep pumping money than to reverse course when inflation starts to bite into purchasing power,” he said.
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