Results 1 to 1 of 1

Thread: chart of the week - Inflation - US Incomes Decouple from US Prices

  1. #1
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default chart of the week - Inflation - US Incomes Decouple from US Prices

    from

    (snip)"The specific purpose is to drill down and question what we see as a bit of consensus logic of the moment pertaining to inflation. Right to the point, and we've discussed this historical truism many a time ourselves over the years, history is clear that prior bouts of headline inflation in the US have been very rightfully accompanied by wage inflation. We offer you the following chart as to why this perception is held so dear by so many. We're very simply looking at the year over year change in the headline CPI set against the year over year change in average hourly service sector wages (the service sector being by far the largest employer in the US). The directional correlation here is quite high. But we will admit, and this we believe will be very important in just a minute, that the linkage/correlation here has become a good bit less tight starting in the late-1990's.



    we know the very strong perception exists that in an environment where US wage growth is not accelerating on a rate of change basis, as is exactly the case now, there is no way higher commodity prices can ultimately be passed through into final goods prices for any extended period of time. Without wage growth, only a draw down of personal savings can "fund" inflationary pressures for a time. Wildly enough, post the rise in gasoline prices we saw earlier this year, the US savings rate has indeed declined a bit to help buffer the blow for now. You can see exactly this in the recent numbers. In essence, history tells us that there is no way inflationary pressures can continue to grow ever larger in the US if wage growth does not ultimately show up to support and perhaps help further accelerate those higher prices. In a wage growth deprived macro US economy, there is no way higher commodity costs can exist for a sustainable period of time. Oh really? As we've tried to suggest a million times over the years, we're in a changed world. Globalization changes everything. It's no longer a one chessboard global economy, but rather a three tiered multi-dimensional macro economic gaming environment. As you'd guess, for now the old rules do apply...until they don't.(snip)

    (snip)"This is again why so many folks on let's call it the non-sustainable inflation side of the argument have literally planted the flag. Their position is that there is no way inflation (as meaning really higher prices for food and energy essentials) can take hold in the current environment. In fact we do know one specific central banker who also seems convinced higher commodity prices in the current cycle are transitory and temporary, as this history we've shown you would seem to justify. But is he still expecting to play the global economy game on one chess board?

    One last view of life in what we suggest to you is a changing world. It's an update of one you've seen before, but again is a key relationship the "temporary and transitory inflation" crowd are banking upon conceptually to validate their non-inflationary case. Very quickly it's the nominal dollar history of West Texas crude prices alongside the same year over year change in US service sector wages. What we've done with the light green colored bars is look at what happened historically to the rate of change in wages when crude prices accelerated meaningfully. Key point being, since 1974 every time crude oil prices accelerated over a certain period of time, the year over year rate of change in service sector wages was accelerating. Every single time. The only two exceptions to this rule were seen during the periods shaded in purple - the 2007-08 period and in the present environment.



    Of course we watched oil prices rocket to the moon in 2008 while the rate of change in US wages was decelerating and what happened? Just as history would have academically predicted the US fell into a recession. Chalk one up for the transitory and temporary crowd, right? But we suggest that we all think much more broadly as the prior cycle that witnessed the spike in oil was not only about the increasing importance of globalization to physical commodities, but also about unchecked speculation and the growing integration of commodities as an asset class to institutional investors globally.

    So we know you get the picture. Again, as we step back and look at the lessons of history, we can see how the temporary and transitory crowd can be so adamant in their conviction that in the absence of US wage inflation, commodity price acceleration and inflation in general are unsustainable. But as suggested, it's time to start thinking more broadly. Specifically, it's time to starting monitoring the character of wages alright - the character of non-US wages.

    To get us thinking in this direction and to unshackle the constraints of viewing life only within the context of US historical experience, and certainly to pay homage to the three dimensional chess board that is the global economy of the moment, let's look East for anecdotes of change. You already know that probably a few months back, the wonderful folks at Li and Fung (Asia's largest retail supply chain management firm) told us that price increases coming from Asia would be a certainty, it is now only a matter of how much of the cost increases Li and Fung customers will be able to pass through into final goods prices to their customers served. It was only a few weeks later that the CEO of Wal-Mart said essentially the same in telling folks to expect higher prices broadly that would stick, nothing temporary about it. It was just recently that William Fung (the Fung of Li and Fung) revealed in the Wall Street Journal that he now expects an 80% increase in wages across the Asian community over the next five years. You'll again remember that the FoxConn employee riots of February of 2010 resulted in approximately 30% wage increases for their employees by the summer of last year. Rising wages in the emerging markets is a certainty.(snip)

    (snip)"Is this telling us that at the margin what is occurring with wages in China since that time is having a potentially greater impact on the rhythm and reality of global commodity prices? We think this is exactly what it's saying. In very simple terms what we believe we are "seeing" is nothing more than the evolution of the global economy.

    So again, we know you get it. We believe declaring higher commodity prices and higher inflationary pressures a transitory or temporary phenomenon based solely on lack of meaningful US wage growth is shortsighted at best and perhaps very dangerous in investment decision making. The reality is that we are already seeing a number of Chinese manufacturers attempt to outsource themselves in this period of higher labor costs. Outsourcing to places like Vietnam has been done. Unfortunately Vietnam simply is not a large enough economy to have a meaningful impact on or act to offset domestic Chinese wage trends.(snip)

    (snip)Indeed perhaps we can't really have inflation without wage growth. We just suggest you be careful about to whose wages you are referring.(snip)

    ~
    Last edited by Melonie; 07-03-2011 at 07:49 AM.

Similar Threads

  1. Replies: 1
    Last Post: 05-15-2011, 02:17 PM
  2. Replies: 0
    Last Post: 02-18-2011, 09:30 AM
  3. chart of the week - inflation's leading indicator
    By Melonie in forum Dollar Den
    Replies: 1
    Last Post: 04-11-2010, 08:18 PM
  4. Replies: 0
    Last Post: 08-02-2008, 12:28 PM
  5. chart of the week - US inflation rate
    By Melonie in forum Dollar Den
    Replies: 3
    Last Post: 06-25-2007, 09:14 AM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •