Rising Inflation, Falling Home Prices and Low Wage Increases Don't Mix

by: Mark J. Perry
The chart above shows the annual growth rates in: a) consumer prices (NYSEARCA:CPI), b) average hourly earnings, and c) the FHFA home price index from 1976 to 2010. The double-digit CPI inflation of the late 1970s was accompanied by: a) double-digit increases in home prices for 11 straight quarters from 1977 to 1979, and b) 69 consecutive months with year-over-year wage increases of 7% or higher.
Currently, we've had 22 consecutive months of year-over-year wage increases below 3%, and b) 13 consecutive quarters of negative year-over-year home price increases starting in late 2007. Given the past historical patterns of inflation being accompanied by rising wages and home prices, it seems like the proponents of pending inflation have to explain how inflationary pressures can be building in the economy with: a) falling home prices and b) wage increases of 2% that are less than half the 4.5% average since 1965? It would be historically unprecedented to start experiencing rising inflation in 2011 with falling home prices and stagnant wages, and unless and until we start seeing rising home prices and wages we might not see higher inflation this year.