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Sat, 17 May 2008
Watching out for inflation, and for the CPI
Headlines the past couple of months have made it pretty clear that we're in for some interesting economic times ahead. But who needs headlines? Most of the important news is pretty clear on any trip to the grocery store. Food prices are up sharply, and since gas prices are mounted in foot-tall numbers on the side of the road, few of us have missed the portents there, either. Medical inflation is high, too.
Meanwhile, the Consumer Price Index (CPI) has been quite low for a number of years, and is only up to 4% now. It may not have much to do with the level of prices any more, though. The government modifies the index from time to time, but lately they've been making modifications that are convenient -- to them.
The value of the CPI is based on a basket of goods, and it's supposed to be comparable from one year to another. The problem is that the goods people buy change. When the CPI was established, cell phones and computers didn't exist, but many now consider them essential. But that's not all. There are lots of other adjustments that are made. For example, because a cheap computer can do more than a cheap one from ten years ago, the CPI economists say the "effective" price has gone down, even if the actual price has not. (And just try to buy one of those ten-year-old models.)
Housing prices are funny, too. The CPI uses "imputed rent" as its measure of housing costs. For homeowners, this is the rent you might get if you rented out your house. But if you don't rent your house, and pay considerably more than market rent for it, as many people do, the CPI doesn't match your experience.
In other words, in adjusting the CPI from one year to the next, there are a hundred little decisions to make. In a world where a President's political success is closely tied to the health of the economy, I'm sure it will come as a great shock to you to learn that in virtually every one of those decisions over the past 20 years, the choice was made that would minimize the apparent level of inflation. This leaves the CPI as a good statement of the official line on inflation, but maybe not so much more.
The result is that measures that are tied to inflation -- cost of living adjustments in labor contracts and pension systems, as well as budget decisions by incurious legislators and town councilors -- fall behind the real level of prices.
Those of us who can recall the 1970's wonder if that kind of inflation is in store. Well, no one really knows, but it's hard to see how it could happen like that now. That is, serious, systemic inflation is caused by rising prices putting pressure on wages which in turn increase prices, and there's a problem with that.
It's pretty clear that rising prices are putting pressure on people, but you can't have a "wage-price spiral" without the wages part. Real wages have stagnated for years, and the truth is that workers in America are in as weak a position as they've been since the 1920's. Between the rise of global trade that has made so many of us competitors with our Asian counterparts, and the loss of union power, where is the upward pressure on wages to come from? (Not to mention that we have become a nation of workers who reflexively side with management in labor disputes, something that will drive future historians nuts as they try to make sense of our society.)
In other words, we're all going to get squeezed by what's coming, and that's particularly bad news for Rhode Island. It is a curious fact of our economy that, while white-collar jobs here pay only a bit less than their counterparts in Massachusetts and Connecticut, blue-collar jobs tend to pay quite a bit less. (You can read more about this at at whatcheer.net, or check it out yourself at careerjournal.com.) Housing and food costs aren't appreciably lower, so people on the lower end of the scale are going to get squeezed even more here than in our neighboring states. We're not necessarily talking about poor people here, just people at the low end of the middle and below.
Those people obviously don't have a lot of money to spend, but two facts make up for that and give them an outsize effect on our economy. One is that -- on average -- they save almost nothing and spend virtually everything they get, and the other is that there are a lot of them.
So this is what's going to happen: people at the lower end of the income scale are going to get squeezed more here than in our neighboring states simply because they are poorer here. Our state government, so dominated by budget-cutters, will do nothing to help them, and the loss of that spending will help keep our economy in the doldrums longer than our neighbors.
And our Governor and Assembly leaders will wonder, a couple of years hence, why their tax cuts didn't do the trick. But they'll find someone to blame.
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