July 17, 2025

The happy side of inflation fears

They did it again.

They did it again.

Worried about inflation–again–the Federal Reserve Bank raised interest rates–again–which will–yes, again–have an impact on any of us who earn, borrow, or save money.

Why the inflation worries? After all, consumer prices in the states aren’t really going up much.

The answer lies in the opposite of our situation in Saipan. Here: flat economy, sky-high unemployment. Result: No worries about inflation.

In the land of milk and honey, though, the booming economy has drained the labor pool of otherwise idle talent. We used to say that an unemployment rate of five percent was “structural,” meaning it was intrinsic background static that would always be there.

Oops. We were wrong.

Unemployment is now under five percent–bouncing around the four-point-something level from month to month. With such a scarcity of labor, employers have to raise wages in order to compete for the talent. Higher wages, then, are seen as a potential fuse-lighting for the inflation bomb.

For inflation watchers, such signs are troubling. And since we’re all inflation watchers, the prospect of rising labor costs is considered spooky by the conventional wisdom.

But hold on a minute. Conventional wisdom is sometimes more convention than it is wise. Increased wages mean more money for all the worker bees out there. What’s wrong with that? Isn’t that the point of economic growth?

Would folks be happier if wages were falling? Of course not.

Inflation in this case is a sign of economic health, not of financial illness. A lot of high powered executives in the states have become millionaires–billionaires, even–as the economy kept soaring to nosebleed heights. Why shouldn’t the worker bees get their share of the economic bounty?

You can basically increase your wealth by two methods: by using your labor, or by using your capital (I’m leaving bribes, graft, and corruption–a favored alternative in some places–out of the equation here.)

Many captains of industry, and even normal households with good savings habits, have seen their capital gains shoot through the roof, hitched to the meteoric stock market. Which is yet another sign of good economic health. It’s inevitable that market forces would also reward the labor side of the coin, and that ever more productive capital would mean ever more productive labor, which would bring higher returns to those that perform the labor.

Ah, productivity. So important…and so misunderstood in a lot of places. Lousy economies lose sight of productivity and try to increase wages by legislation–which actually reduces, not increases, the total amount of wages paid in an economy. If you doubt that, then consider what would happen if the minimum wage was $100 per hour. How many people would have jobs? What would happen to the total amount of wages paid in such an economy?

American workers are amongst the world’s most highly paid, and I expect that they’ll continue to improve on this score. This is, then, the hidden and happy secret behind the inflation worries that are constantly looming.

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