In the litany of explanations for the stock market downdraft, the return of inflation is one that deserves the attention of long-term investors.
For years, almost a decade now, the worry about consumer inflation has concentrated on the risk of falling prices. Now, with the January jobs report showing average hourly wages growing 2.9 percent, suddenly rapidly rising prices is the worry.
In the week ahead, that worry will be put to the test with the release of the January Consumer Price Index on Wednesday.
It’s important to note that inflation is not a higher price for avocadoes at the grocery store, or paying $1,000 for the newest iPhone. It isn’t the cost to see a doctor or what you pay for a haircut. Inflation is all those and more. Inflation is the general rise in overall prices over time. Quickly rising prices are dangerous for an economy, just as are rapidly falling prices. The Federal Reserve’s goal is a steady average of two percent inflation. Except that it has been coming up short for years, until now - or at least that is the worry on Wall Street.
Wall Street logic can be tortured. Why would bigger paychecks for working Americans fuel a sharp sell off in stocks? Won’t higher pay help workers buy more, leading to higher profits? Well, yes. But better pay leading to more buying could lead to higher prices forcing the Federal Reserve to raise interest rates faster than expected in an effort to slow down faster economic growth leading to slower growing pay checks, slower growing demand and slower growing profits. Whew. Follow that?
As former executive director of the White House Task Force on the Middle Class Jared Bernstein wrote in the Washington Post, “There are a lot of links in that chain.” But as Bloomberg noted, “Investors have finally detected the whiff of inflation.”
Fumes of inflation may be welcome news, but not a stench.
Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami. Follow him on Twitter @HudsonsView.