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Wage inflation sharpens RBA dilemma

By Henry Thornton - posted Wednesday, 6 April 2011


The US economy created 216,000 new jobs in March, and its rate of unemployment  fell to 8.8 %.  This added to other indicators of recovery, including an annual rise of 5.6 % in industrial production, to generate some serious optimism about eventual US recovery.

Despite improvement in the labor market, many workers are barely treading water as their wages fail to keep up with rising prices.

Average hourly earnings for all private-sector workers, including salaried employees, were flat in March. Wages have moved little in the past six months despite consistent job gains during that period and for some workers there has been a long decline in 'real' (inflation adjusted) wages.

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Compared with a year earlier, average hourly earnings were up just 1.7 % in March. Inflation is running above 2 %, largely due to higher energy and food prices, which means workers' average inflation-adjusted wages have declined.

The massive task of reducing America's multi-trillion budget deficits remains, though the chances of Mr Obama presiding over the process will keep rising if the labor market does.

The US Fed is also reportedly beginning to think about ending quantitative easing (= printing money) and raising interest rates. When this occurs the world will be a safer place, though risks of global inflation will remain at least until US interest rates are normalised.

Growth in China's manufacturing activity rebounded in March, showing growth of almost 15 %, while inflation pressures stayed high even though the rate of price rises eased slightly to 4.9 %.

Other emerging nations are booming, with industrial production growth 3.7 % in India, 7.6 % in Indonesia, 5.8 % in Russia and 2.5 % in Brazil. Inflation in these nations ranges from 6 % in Brazil to 9 % in Russia.

Japan is facing monumental spending on recovery from its triple disaster of earthquake, tsunami and nuclear meltdown, on one estimate adding US$250 to US$ 300 billion to a budget deficit of one trillion.

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The European Central Bank is nerving itself to raise its benchmark interest rate this week for the first time in almost three years. The Eurozone's monetary policy will never suits all 17 members of the euro area.  The multispeed Eurozone economy ranges from record expansion to recession with fears of a sovereign-debt crisis.

Compare Germany, with growth of industrial production of 12.4 % and unemployment 7.1  % with Spain, industrial production 6.0 % and unemployment 20.4  %.  Double each unemployment number to allow for underemployment and the size of the gap is evident.

The predicted gradual normalization of interest rates from a record low of 1 % will disproportionately hurt Spain (unemployment 20 %), Greece (almost 15 %), Portugal (11.1 %) and Ireland (14.7 %), while failing to stop inflation threats in Germany.  (All these numbers come from the latest edition of The Economist.)

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About the Author

Henry Thornton (1760-1815) was a banker, M.P., Philanthropist, and a leading figure in the influential group of Evangelicals that was known as the Clapham set. His column is provided by the writers at www.henrythornton.com.

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