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This time, wage slaves can't revolt
The Fed is banking on a weak labor market to keep employees from
demanding wage hikes that could boost inflation. But consumers
are feeling pinched.
By Colin Barr, senior writer
NEW YORK (Fortune)
-- With the price of practically everything jumping, you
probably wouldn't mind getting a bigger paycheck.
But your employer isn't the only one who's unenthusiastic about
that idea. Fed chief Ben Bernanke is counting on a weak labor
market to keep employees from demanding wage hikes, which could
in turn boost inflation. With unemployment rising and jobs
moving overseas, you're probably not in the mood to push it
anyway.
So the good news is that the Fed's probably right when it says
that we're not headed for a replay of the stagflation of the
1970s, replete with its so-called wage-price spiral.
Unfortunately, that means Americans are going to be feeling
poorer - with no end in sight.
Soaring costs
On Thursday, the government said consumer prices soared 5.6%
from a year ago in July, the biggest year-over-year rise in 17
years. Much of that increase was driven by the soaring costs of
food and energy, though Bank of America economist Lynn Reaser
notes that prices were sharply higher across the board.
"This number was a shocker," Reaser says, adding that
practically "the only benign increase was in health care," where
prices - after years of strong growth - were a modest 3.5% above
year-ago levels.
The textbook response to soaring inflation is for the Fed to
raise interest rates. But Fed chief Ben Bernanke has spent the
past year slashing rates in a bid to prop up the financial
sector, which is laboring under a mountain of bad loans and
broken credit markets. Where financial institutions used to
borrow heavily in short-term markets such as the repo market,
they now get much of their cash via various federal lending
programs.
Fed's limited options
"They can't tighten credit now, because of where banks are
getting their funding," says Howard Simons, a strategist at
Bianco Research in Chicago.
Moreover, the Fed appears willing, for now, to accept a few
months of big headline inflation numbers as long as there's no
sign of the dreaded wage-price spiral - the 1970s phenomenon in
which inflation took root as pinched workers demanded raises.
With the economy slowing, and wages stagnant for most of the
past decade, a weak labor market is giving the Fed room to stand
pat. Unemployment has risen by more than a percentage point, to
5.7%, since the housing boom peaked in the middle of this
decade. The four-week seasonally adjusted moving average of new
jobless claims was 440,500 last week - up 40% from a year ago.
Along with the recent decline in energy prices and a rally in
the value of the dollar, the soft labor market numbers should
ease the pressure on wage growth, Reaser says. She adds that
next month's inflation numbers should look better, given the 20%
drop in the price of crude oil since mid-July.
But what's good for the Fed, in this case, is bad for consumers.
Combine a slack labor market with falling prices for stocks and
houses, and it's clear that Americans' finances are getting
stretched by the month - with no end in sight.
"The American worker does not have a whole lot of bargaining
power right now," says Simons. "We're looking at the
impoverishment of the American wage earner.
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