Inflation is a topic many people have been talking about recently, but does it really affect you?
With volatility in the stock market recently rising inflation has been blamed as the culprit but Carl Carlson from Carlson Financial said wage growth exceeded expectations in January’s report. Though unemployment has been low for awhile, he said wages haven’t been growing at a very fast pace.
The sluggish wage growth has been a topic of concern for a lot of people in the last couple years. Now that wages are rising, many believe that will cause prices to go up as well. To them, this implies higher than anticipated interest rates are ahead, which they think will be bad for stocks, Carlson said.
This is a flawed theory, Carlson said, one that was proven wrong by Nobel Prize winner Milton Friedman. Wages don’t drive inflation. Inflation is caused by too much money chasing too few goods. Money doesn’t mean the amount of our paychecks, it refers to the money supply in the system. Just because wages are rising, it doesn’t mean the money supply is rising.
Wages are an after-effect of inflation. When employers are competing for workers, they factor inflation into the wages they offer. When inflation is low, wage growth is generally slow. When inflation is high, employers will have to increase what they are willing to pay, but you see that inflation is already baked into wages. If you want a better indicator of inflation, look at loan growth, the money supply growth and the CPI, which yesterday did bump up about .5%, Carlson explained.
As for stocks, Carlson doesn't think this means anything significant, we’ve seen a normal correction. Inflation and rising interest rates aren’t inherently bad for stocks.
Over the last few months, there has been focused on how low interest rates, low inflation, and sluggish wage growth have been holding back the economy. Now that there is a whiff of change, people – and markets – have a temporary panic moment.
There hasn’t been any fundamental change in the strength of the economy, but that doesn’t stop markets from being finicky in the short-term. Carlson said to expect the volatility to continue for awhile and do what it takes to stay level-headed.