The story’s number three on Blogdex: “Wages Lagging Behind Prices“. Worker pay raises trail inflation but the numbers obscure the severity, suggesting the problem is worse than it appears.
The base of the LA Times the story is this: “For the first time in 14 years… growth in wages in 2004 and the first two months of this year trailed inflation… The effective 0.2-percentage-point erosion in workers’ living standards occurred while the economy expanded at a healthy 4%.”
The reality behind the numbers, unfortunately, is that inflation was higher than reported because certain key expenses for households are excluded from the Consumer Price Index (CPI). Key among these uncounted costs are energy and housing prices, ironically enough, two of the four examples cited of higher prices facing consumers. The other two examples that actually are included in the CPI are food and health care.
The article refers to one Victor Romero, who “had to ditch his $1,100-a-month Hollywood apartment because his rent kept rising while his pay… stayed flat.” It also refers to Corina Swatz: “neither she nor her husband has gotten a raise in more than a year… (while) …gas prices have forced them to shell out $55 to fill the tank of their Chevy Tahoe.”
The only good news the article offers to workers is that their total wealth has probably increased if they own a home because real estate prices have stayed strong. This strikes me as a suckers consolation prize, because unless you sell your home the increase in net worth doesn’t help you ballance your checkbook. Increases in net worth from real estate are also fragile because many home buyers opted for a low variable APR in recent years. If these home owners are already dealing with tight cash flows they will be ill able to absorb an increase in morgage payments that would result from higher interest rates. When the initial period of locked-in interest rates expires, a modest rise in interest may force many variable APR home buyers to sell. En mass, we’re looking at a decline in home prices, a buyer’s real estate market and the attendant rise in demand for rental units (and rent prices).
The article suggests “The danger is that people… despite their home equity cushion, may pull the rug out from under the economic expansion by reining in their spending.” I can’t help but think that’s rather optimistic: The real danger is that people have a smaller cushion against any number of factors that could pull the rug out from under them. If economic expansion slowed, maybe wages could catch up and give people a larger cushion, but a few more years of “healthy expansion” like this… It don’t look good.