Good article from Bloomberg:
http://www.bloomberg.com/news/2011-...lation-increase-hinges-on-low-wage-gains.html
"Brady Miller is paying more for vinyl siding for his construction business and for groceries to feed his family. He canât charge customers more, showing why some Federal Reserve officials say inflation will ease.
âWe donât spend money on anything, we donât take vacations, and I am not saving money right now,â Miller, 36, says. He has told his wife that he is going to drive their 2005 Dodge Caravan âuntil that thing falls apart.â
The Mossville, Illinois, homebuilder also hasnât given his crew of two a raise in two years and says they shouldnât expect one soon. Their predicament illustrates the downside of what Fed Vice Chairman Janet Yellen calls âtransitoryâ inflation: Household purchasing power is shrinking because wages and salaries arenât keeping pace with food and energy prices.
Researchers at the Federal Reserve Bank of New York are also finding no evidence that higher prices are boosting expectations for wage increases, suggesting underlying inflation and consumer spending will remain low. Thatâs why officials led by Fed Chairman Ben S. Bernanke will be in no hurry to withdraw record stimulus after completing a $600 billion bond-purchase program in June, said Michael Feroli, chief U.S. economist at JP Morgan Securities LLC.
âItâs tough,â Feroli said. âConsumers will have to reduce real spendingâ if they donât draw down savings or take on more debt. He said the Fed will probably keep its balance sheet constant by reinvesting maturing bond proceeds for several weeks after it stops outright purchases. It may then allow the record $2.69 trillion balance sheet to âpassively declineâ in the second half of this year as investments mature, said Feroli.
Stay Near Zero
Feroli is also among analysts who say the Federal Open Market Committee, which concludes a two-day meeting tomorrow, is likely to repeat that the key interest rate will stay near zero for âan extended period.â
Economists at New York-based JPMorgan Chase & Co. cut their estimate for U.S. growth in the first quarter to a 1.4 percent annual rate from 2.5 percent. That would be less than half the fourth quarterâs 3.1 percent pace. One reason for the slowdown: consumer dollars after inflation buy fewer goods and services.
The consumer price index rose 2.7 percent for the year that ended in March, the fastest 12-month pace since December 2009. Average hourly earnings, adjusted for inflation, fell 1 percent during the same period.
âIf the labor market were tight, workers could say, âI am getting squeezed, can I get a raise?ââ said Julia Coronado, chief economist for North America at BNP Paribas in New York. Thatâs not an option with 13.5 million unemployed Americans competing for work and a jobless rate of 8.8 percent, she said.
Political Unrest
Inflation is accelerating as political unrest in the Middle East drives up the price of crude oil, and rising demand in China and other emerging markets -- coupled with droughts in grain-exporters such as Russia -- pushes up food prices. The average price for unleaded gasoline stands at $3.86 per gallon, according to the American Automobile Association, a 35 percent increase from a year ago.
The breakeven rate for two-year Treasury Inflation Protected Securities, the yield difference between the inflation-linked debt and comparable maturity Treasuries, has risen to 2.57 percentage points in New York from 2.48 percentage points at the end of March.
Petroleum-based homebuilding materials like shingles and felt paper âhave consistently gone upâ in price, Miller said. âI have had to lower my margins just to keep busyâ in the face of tighter competition during the recent economic downturn, he said. âI am getting my ass kicked.â
Excluding food and energy, which tend to be volatile, consumer prices rose 1.2 percent in March from a year earlier. A gauge watched by Fed policy makers, which tracks prices tied to consumer spending, rose by 0.9 percent. That compares with the Fedâs long-term goal of about 2 percent inflation.
Recent âShocksâ
âRecent commodity price shocks are likely to have only a transitory effect on inflation,â Yellen said in an April 11 speech to the Economic Club of New York. âWith resource slack likely to diminish only gradually over the next few years, it seems reasonable to anticipate that underlying inflation will remain subdued for some time,â she said.
Yellen said the Fedâs current âaccommodative stanceâ is still appropriate because âunemployment remains elevatedâ and âlonger-run inflation expectations remain well anchored.â
How households form expectations for future inflation is the subject of research by New York Fed economists who teamed up with behavioral psychologists from Carnegie Mellon University in Pittsburgh and researchers from RAND Corp., the Santa Monica, California-based research firm.
Median Wage Growth
Their survey of about 400 people in February showed that year-ahead median wage growth expectations remained below 1 percent, where they have been since February 2009.
âWhile this is a troubling sign for wage earnersâ incomes, it suggests that concerns about wages exerting second-order effects on inflation are not founded at present,â New York Fed economist Giorgio Topa and colleagues wrote in an April 18 blog.
That hasnât stopped some companies from passing rising costs on to consumers. Ford Motor Co. (F), the second-largest U.S. automaker, raised prices by $117, or 0.4 percent, per vehicle this month because of higher costs for raw materials such as steel.
Hartford, Connecticut-based United Technologies Corp. (UTX), the worldâs largest maker of air conditioners, increased prices about 2 percent to 6 percent in its Carrier residential division in February to offset higher prices for copper.
âThose prices seem to be sticking,â chief financial officer Gregory Hayes told investors on an April 20 conference call.
Inflation Tolerance
How many companies follow suit depends in part on whether consumers and executives believe the Fed will allow inflation to continue.
One measure of such expectations, the Thomson Reuters/University of Michigan Surveys of Consumers, showed respondents in April expected prices to rise 4.6 percent over a year, the same as in March and the highest reading since August 2008.
âThe Michigan measure appears to reflect expectations of food and gasoline price increases to a much larger extent than is suggested by their share in household expenditures and in measures of overall inflation such as the consumer price index,â Topa and colleagues wrote in their April 18 blog. Food and gasoline account for about one fifth of the CPI.
Richard Curtin, Director of Reuters/University of Michigan Surveys of Consumers, defended its results.
âAlleged Biasâ
âDespite the alleged bias, this inflation expectation series has been repeatedly found to forecast the year ahead inflation rate with an accuracy on par with professional economists,â Curtin said in an e-mail.
The University of Michiganâs survey asks about âprices in general.â In a separate survey, New York Fed-RAND researchers asked about the outlook for the ârate of inflation.â
Respondents in the New York Fed-RAND survey âtended to think less about a few salient price changes specific to their own experiences and more about price changes across a broader set of items,â Simon Potter, co-head of the New York Fedâs research and statistics group, said in a March 30 speech.
New York Fed-RAND surveys also show that when households in February were asked about year-ahead changes for âprices in general,â the median response was 3.8 percent, up from 2.4 percent in September, a gain of more than a percentage point.
By contrast, the ârate of inflationâ question produced a median expectation of 3.2 percent inflation over the next year compared with 2.5 percent in September.
Validate Prices
Miller, the Illinois homebuilder, said people in his community of about 186,000 in Peoria County, many of whom work in manufacturing, probably wonât increase spending and validate higher prices.
Caterpillar Inc. (CAT), for example, which has about 16,000 employees in the Peoria region, reached its corporate goals for incentive pay in 2010, and qualifying employees received checks in March. There was no incentive pay in 2009.
Caterpillar employees he knows âare not going out and spending that money,â Miller said. âWhen they get that bonus they are either socking it away for the next time, or they are paying down debt.â
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomgerg.net.
To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
http://www.bloomberg.com/news/2011-...lation-increase-hinges-on-low-wage-gains.html
"Brady Miller is paying more for vinyl siding for his construction business and for groceries to feed his family. He canât charge customers more, showing why some Federal Reserve officials say inflation will ease.
âWe donât spend money on anything, we donât take vacations, and I am not saving money right now,â Miller, 36, says. He has told his wife that he is going to drive their 2005 Dodge Caravan âuntil that thing falls apart.â
The Mossville, Illinois, homebuilder also hasnât given his crew of two a raise in two years and says they shouldnât expect one soon. Their predicament illustrates the downside of what Fed Vice Chairman Janet Yellen calls âtransitoryâ inflation: Household purchasing power is shrinking because wages and salaries arenât keeping pace with food and energy prices.
Researchers at the Federal Reserve Bank of New York are also finding no evidence that higher prices are boosting expectations for wage increases, suggesting underlying inflation and consumer spending will remain low. Thatâs why officials led by Fed Chairman Ben S. Bernanke will be in no hurry to withdraw record stimulus after completing a $600 billion bond-purchase program in June, said Michael Feroli, chief U.S. economist at JP Morgan Securities LLC.
âItâs tough,â Feroli said. âConsumers will have to reduce real spendingâ if they donât draw down savings or take on more debt. He said the Fed will probably keep its balance sheet constant by reinvesting maturing bond proceeds for several weeks after it stops outright purchases. It may then allow the record $2.69 trillion balance sheet to âpassively declineâ in the second half of this year as investments mature, said Feroli.
Stay Near Zero
Feroli is also among analysts who say the Federal Open Market Committee, which concludes a two-day meeting tomorrow, is likely to repeat that the key interest rate will stay near zero for âan extended period.â
Economists at New York-based JPMorgan Chase & Co. cut their estimate for U.S. growth in the first quarter to a 1.4 percent annual rate from 2.5 percent. That would be less than half the fourth quarterâs 3.1 percent pace. One reason for the slowdown: consumer dollars after inflation buy fewer goods and services.
The consumer price index rose 2.7 percent for the year that ended in March, the fastest 12-month pace since December 2009. Average hourly earnings, adjusted for inflation, fell 1 percent during the same period.
âIf the labor market were tight, workers could say, âI am getting squeezed, can I get a raise?ââ said Julia Coronado, chief economist for North America at BNP Paribas in New York. Thatâs not an option with 13.5 million unemployed Americans competing for work and a jobless rate of 8.8 percent, she said.
Political Unrest
Inflation is accelerating as political unrest in the Middle East drives up the price of crude oil, and rising demand in China and other emerging markets -- coupled with droughts in grain-exporters such as Russia -- pushes up food prices. The average price for unleaded gasoline stands at $3.86 per gallon, according to the American Automobile Association, a 35 percent increase from a year ago.
The breakeven rate for two-year Treasury Inflation Protected Securities, the yield difference between the inflation-linked debt and comparable maturity Treasuries, has risen to 2.57 percentage points in New York from 2.48 percentage points at the end of March.
Petroleum-based homebuilding materials like shingles and felt paper âhave consistently gone upâ in price, Miller said. âI have had to lower my margins just to keep busyâ in the face of tighter competition during the recent economic downturn, he said. âI am getting my ass kicked.â
Excluding food and energy, which tend to be volatile, consumer prices rose 1.2 percent in March from a year earlier. A gauge watched by Fed policy makers, which tracks prices tied to consumer spending, rose by 0.9 percent. That compares with the Fedâs long-term goal of about 2 percent inflation.
Recent âShocksâ
âRecent commodity price shocks are likely to have only a transitory effect on inflation,â Yellen said in an April 11 speech to the Economic Club of New York. âWith resource slack likely to diminish only gradually over the next few years, it seems reasonable to anticipate that underlying inflation will remain subdued for some time,â she said.
Yellen said the Fedâs current âaccommodative stanceâ is still appropriate because âunemployment remains elevatedâ and âlonger-run inflation expectations remain well anchored.â
How households form expectations for future inflation is the subject of research by New York Fed economists who teamed up with behavioral psychologists from Carnegie Mellon University in Pittsburgh and researchers from RAND Corp., the Santa Monica, California-based research firm.
Median Wage Growth
Their survey of about 400 people in February showed that year-ahead median wage growth expectations remained below 1 percent, where they have been since February 2009.
âWhile this is a troubling sign for wage earnersâ incomes, it suggests that concerns about wages exerting second-order effects on inflation are not founded at present,â New York Fed economist Giorgio Topa and colleagues wrote in an April 18 blog.
That hasnât stopped some companies from passing rising costs on to consumers. Ford Motor Co. (F), the second-largest U.S. automaker, raised prices by $117, or 0.4 percent, per vehicle this month because of higher costs for raw materials such as steel.
Hartford, Connecticut-based United Technologies Corp. (UTX), the worldâs largest maker of air conditioners, increased prices about 2 percent to 6 percent in its Carrier residential division in February to offset higher prices for copper.
âThose prices seem to be sticking,â chief financial officer Gregory Hayes told investors on an April 20 conference call.
Inflation Tolerance
How many companies follow suit depends in part on whether consumers and executives believe the Fed will allow inflation to continue.
One measure of such expectations, the Thomson Reuters/University of Michigan Surveys of Consumers, showed respondents in April expected prices to rise 4.6 percent over a year, the same as in March and the highest reading since August 2008.
âThe Michigan measure appears to reflect expectations of food and gasoline price increases to a much larger extent than is suggested by their share in household expenditures and in measures of overall inflation such as the consumer price index,â Topa and colleagues wrote in their April 18 blog. Food and gasoline account for about one fifth of the CPI.
Richard Curtin, Director of Reuters/University of Michigan Surveys of Consumers, defended its results.
âAlleged Biasâ
âDespite the alleged bias, this inflation expectation series has been repeatedly found to forecast the year ahead inflation rate with an accuracy on par with professional economists,â Curtin said in an e-mail.
The University of Michiganâs survey asks about âprices in general.â In a separate survey, New York Fed-RAND researchers asked about the outlook for the ârate of inflation.â
Respondents in the New York Fed-RAND survey âtended to think less about a few salient price changes specific to their own experiences and more about price changes across a broader set of items,â Simon Potter, co-head of the New York Fedâs research and statistics group, said in a March 30 speech.
New York Fed-RAND surveys also show that when households in February were asked about year-ahead changes for âprices in general,â the median response was 3.8 percent, up from 2.4 percent in September, a gain of more than a percentage point.
By contrast, the ârate of inflationâ question produced a median expectation of 3.2 percent inflation over the next year compared with 2.5 percent in September.
Validate Prices
Miller, the Illinois homebuilder, said people in his community of about 186,000 in Peoria County, many of whom work in manufacturing, probably wonât increase spending and validate higher prices.
Caterpillar Inc. (CAT), for example, which has about 16,000 employees in the Peoria region, reached its corporate goals for incentive pay in 2010, and qualifying employees received checks in March. There was no incentive pay in 2009.
Caterpillar employees he knows âare not going out and spending that money,â Miller said. âWhen they get that bonus they are either socking it away for the next time, or they are paying down debt.â
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomgerg.net.
To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net
