Flawed WSJ Editorial: Wages Are Also a Price

by: Mark J. Perry

From today's flawed WSJ editorial "Inflation May Be Worse Than We Think" by David Ranson:

The graph at right shows how rapidly the purchasing power of income declines from an ongoing inflation of 4%. After nine years, an income of $100,000 is worth only $70,000. After 17 years its purchasing power has been cut in half, and after 30 years by about 70%. The cumulative loss of purchasing power if inflation persists above 4% is an awesome prospect that is surely going to be unacceptable.

Comment: David Ranson is way off-base on his inflation analysis and has made a serious and fundamental error: he has assumed that income remains constant for 30 years and all other prices increase annually by 4%. That's pure nonsense and nitwitery.

Reason? Wages are just another price, the price of labor. And inflation affects all prices, including wages, see chart below:

From 1964 to 2008, average hourly earnings have increased at almost the same rate as the Consumer Price Index, suggesting that Mr. Ranson's graph, adjusted for wage increases at the rate of inflation, would look like this:

Inflation may or may not be a problem, but to assume that prices go up but wages don't IS a real problem for this WSJ editorial.