Average hourly earnings were flat in this morning’s non-farm payrolls report. While we are seeing some sustained income growth it’s highly unlikely that we can see sustained high levels of inflation without a coinciding surge in wages. Wages are at roughly 2.5% on a year over year basis. You can see the very high correlation between inflation and hourly earnings in the following chart. Despite surging commodities the ability to pass on costs remains weak at best. Core inflation should remain below the historical average levels in 2011. The more likely outcome from higher commodity costs is a reallocation of spending, slower economic growth and margin compression.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.