My companions in the peanut gallery were a bunch of old retired guys who spent their days trading off the tape and the tear sheets (company reports that you tore out of a binder). Many of these men and women were in their 80s and had experienced the 1929 crash as young investors. They were storehouses of commonsense wisdom on the markets.
It was from them that I first learned to never believe anything that the Wall Street Journal wrote, unless it was Alan Abelson, or someone like him. The analysts were always wrong they said. “Do the opposite of what they say and you’ll make money!”
I thought they were just a bunch of grumpy old men. Hey, I was 23-24 years old. What did I know? Here it is 45 years later, and I’m one of them.
They taught me to always question, and that’s what I do to this day. And when I do, I’m often amazed at just how easy it is to find the truth in the data, and to see just how blatantly Wall Street misleads us.
Naturally they thought the whole idea of WIN was ridiculous, cornball nonsense. They weren’t the only ones. Alan Greenspan was then the Chairman of the President’s Council of Economic Advisors. He later wrote in one of his many self-exculpatory books that he thought the idea was “unbelievably stupid.”
In the Inflationary 1970s Everyone Knew That Wage and Price Inflation Were Two Sides of the Same Coin
But I digress. The point is that, back then, the economic priesthood and the Wall Street media, which then consisted of only the Wall Street Journal, never considered separating inflation into various components with different descriptors applied to each. It was always WAGE AND price inflation. Not price inflation and “wage growth.”
They knew that the two were inextricably linked. Rising wages were inherently recognized as integral to inflation and the inflationary process. It was unthinkable to unlink them. My goodness, back then even house prices were included in the CPI. As you know, today they are not, having been removed from the index in 1982.
So you would think that economists and fin-journos today would have no problem recognizing that wage inflation and CPI are closely linked. But no! They’re never discussed in the same universe.
Take note when the BLS February jobs report is release, how the rise in wages is reported. The word “inflation” will NEVER be used. It’s always wage growth!
It’s as if somehow we’re supposed to think that the purchasing power of wages increases over the broad sweep of time.
Uh… no. It doesn’t.
CPI and Wage Inflation Always Return to the Same Curve
Since 1964 when the BLS began reporting both hourly wages and CPI when they have diverged, they historically always regressed back toward each other. One can outpace the other for a decade or so, but then the poles reverse. From 1964 until 2008 there was no real wage “growth.” Both consumer prices and wages were measured to have risen by the same percentage! The real consumer purchasing power of one hour of work was the same in 2008 as it was in 2004.
Notice I said “consumer” purchasing power. Back then the cost of a typical house was such that one wage earner could buy one. Today, it takes two, it takes two baby, and for half of American households, even that’s not enough.
Since 2008 wage and price inflation have been diverging. Wage inflation has outpaced CPI inflation. Yes, that’s contrary to the conventional wisdom. We perceive the opposite because median household income has not kept pace. Some wage workers have experienced much greater increases than others. That skews the average higher than what most workers experience. And many workers have fallen out of the wage for work world altogether. They call those folks “self employed” or gig workers. Or unemployed. Or not in the labor force.
There’s no question that these trends muddy the waters a bit, but I think that the general principle of convergence still holds. There will be some convergence of the two series. It may not be total or it may. I don’t know that. But they’ll get closer.
The sea change in central bank monetary activism that took place in 2008 when the world’s major central banks all went gung ho on QE probably played a role in the opening of this divergence. That’s where the gap between wage and price inflation got off to a crashing start. In fact, most of that gap can be accounted for by the 2008 crash, most of it due to energy prices.
With that as the starting point, both wages and prices tracked each other closely until 2014. But CPI fell further behind wage inflation in 2014, when energy prices collapsed again.
Now we know that in the past when these two series diverged for a decade or so, they then began to converge. Here’s an analog. 1964 to 1972.
The two charts above look similar, right?
Now, look what happened from 1973 to 1982. CPI inflation blasted past wage inflation.
Is the Past Prologue?
So is the past, prologue?
The CPI inflation of the 1970s was largely driven by energy prices, with house prices also a huge component. The BLS took care of housing inflation problem by kicking house prices out of the index in 1982. But energy volatility is still a thing. In recent years it has been a 2 way street, but oil prices also collapsed in the 1980s. In the case of oil, what goes down, must come back up, and then some, usually.
Using 2016 as the base year, CPI and wage inflation increased at about the same rate, with minor deviations. But energy prices collapsed in 2018 and CPI dipped a bit, creating a yawning divergence with wage inflation.
Is this a problem? I would say so. Because, again, contrary to popular belief, wage inflation IS accelerating. The 12 month moving average has had a technical breakout and is now at +3.1% and the arc of the curve is apparently accelerating.
I don’t know what the impact of the secular changes in the relative weighting of human labor in the land/labor/capital inputs of production will have. Theoretically, as machine technology advances, the value of human labor could become all but worthless. It’s a horrifying thought. But let’s not worry about the long run. What’s likely in the next few years?
CPI inflation should begin to catch up with wage inflation. This gap has yawned for 11 years, and wages are just now starting to accelerate. That acceleration should begin to pull the prices of consumption goods higher. And I see nothing on this chart to indicate that wage inflation will slow down any time soon.
Let’s not even consider that historically when CPI inflation has lagged wages it has always eventually outpaced it. We’ll just go with the idea that it’s likely to catch up with wage inflation. That means that we’re likely headed for CPI readings of 3% plus.
That will kill any idea of the Fed loosening monetary policy, the very idea that has driven this rally in the stock market, soon to be of blessed memory. It would also be incredibly bad news for the long-term Treasury market.
So I think we are on firm ground if we believe that, despite its recent words, the Fed will not materially loosen monetary policy in the near term, at least not enough to help absorb the mountains of new Treasury supply that will constantly pressure the markets. So my recommendation remains the same. Stay away from both stocks and bonds as long term holds. Hold short term Treasury bills.
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