Rising Inflation Isn’t Worse Than low Job and Wage Growth

While economists are beginning to be optimistic about the economy and while employers are adding more and more jobs, there is one thing that investors are mistaken about. According to them, inflation represents the largest foe in anyone’s attempts at saving.

It’s the first time in 6 years that the unemployment rate has dropped under 6 percent (after a o.2 percent drop to 5.9 percent) and investors are feeling confident. 248,000 new jobs were added in September alone and optimism seems to be the trend of the month. However, the recent Wells Fargo/Gallup survey suggested that over a half of American investors believe that families all over the U.S. are hindered in their ability to save by rising prices caused by inflation.

Only 37 percent of investors considered that stagnant wage growth represented the real culprit.

If we take into account the measure of core inflation (which the Federal Reserve prefers), we’ll note that prices haven’t gone over or under the 2%-target set by the Fed since the recession while the Consumer Price Index has actually fallen for the first time this year. What is more curious is that proclamations of rising inflation (despite the bonds that the Federal Reserve has been buying and despite interest rates being lowered) have not materialized.

Other economies chose to increase interest rates some time ago (Sweden, for instance). They are currently close to deflation. In the US, however, despite the inflation situation, wages haven’t grown at all. Hourly earnings in August haven’t risen over 2.1% and since the recovery, growth rates haven’t budged, remaining at 2%.

It is truly remarkable that unemployment rates are falling and employers offering new positions are the ones to thank for this godsend, however, long-term unemployment has yet to be addressed. There are several million Americans (around 3 million) whose unemployment period stretches well over 25 weeks, and analysts believe that if we were to include workers who have either just given up looking or those working part-time when they would rather work full time, the unemployment rate is actually 12% (well above pre-recession level).

“The Fed is keeping interest rates low as long as they can and maintaining very loose policy in support of jobs. They will only tighten up with great reluctance.”

says USAA chief investment officer Bernie Williams.

Research conducted by David Blanchflower, former Bank of England member, called “The Happiness Trade-Off between Unemployment and Inflation.” showed that unemployment has a worse effect on happiness than inflation:

“Our estimates with European data imply that a 1 percentage point increase in the unemployment rate lowers well-being by more than five times as much as a 1 percentage point increase in the inflation rate.”

“Unemployment hurts more than inflation does.”

Blanchflower added in an interview.

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Anne-Marie Jackson

Anna grew up on a steady diet of 20th century literature, science-fiction movies and Viking lore. Unsurprisingly she turned into a technology geek with an inclination for history & fantasy.