The Consumer Price Index (CPI) increased 0.4% from March to April, while average hourly earnings rose only 0.1%. Combine the two, and you get a 0.3% decline in real average hourly earnings. Not only did real average hourly earnings decline, so did real average weekly earnings. To put this in perspective, real average weekly earnings have fallen 1.7% since October 2010. So while consumer prices have gone up, earnings haven’t kept pace. That is not inflation, but rather a decline in the average standard of living.
It’s not inflation, but it’s still unpleasant
The distinction between broad-based inflation (that is, all prices, including wages, home prices, and other asset prices) and “mere” consumer-price inflation (consumer prices going up without wages and home prices going up) is important to understand. Broad-based inflation typically leads to higher interest rates, while mere consumer-price inflation crimps consumer welfare. Because of today’s consumer-price inflation, I believe interest rates could stay low, and I’d shy away from investing too much in consumer discretionary and consumer staples stocks.
A jump in the price level is not a jump in inflation
It is also essential to recognize the distinction between a jump in the price level and an increase in inflation. Inflation, a continued rise in the price level, is painful for those who have to pay the now higher price. But unless the price keeps rising—instead of just staying at the higher level—then that is not inflation. This is why the Fed can say that the effect of higher commodity prices on inflation is “transitory.” The Fed is looking at continued changes in the price level, not a persistent jump. Thus, by definition, a move to a higher price level has a transitory effect on the rate of inflation.
I believe U.S. growth is sustainable, but at a low level. In fact, my forecast for U.S. growth at the beginning of the year was on the low side of market forecasts (2.5% versus 4.0%). Based on the current environment, I think investors will shift their worries from inflation to concerns about the strength of consumer spending.