Higher Minimum Wage Leads to Inflation

“Sometimes you’re the Louisville Slugger,” Dire Straits once sang. “Sometimes you’re the ball.”

And that’s the story in America, today — sometimes what we think is one step forward is one step back.

For this particular story, the ball will be played by the American minimum-wage earner — those poor saps sold an irresistible pig-in-a-poke by know-it-all labor economists, Democratic politicians and the anti-business rabble that continue to insist that a higher minimum wage will build a stronger middle class (nevermind that wage increases never happen in a vacuum).

The Louisville Slugger, in our story, will be played by Chipotle, Hershey, Dunkin’ Donuts, The Cheesecake Factory, Starbucks, Smucker’s … and I’m sure others will follow along soon enough. They’ve all recently raised prices on their products — products that minimum-wage earners just so happen to spend a larger portion of their income purchasing.

And when Slugger meets cowhide, it’s gonna leave a mark …

They Must Think We’re Stupid

For the last several years, the econo types, the media types and the Bureau of Labor Statistics types have been downplaying inflation. It doesn’t exist, we’re assured, typically with a condescending “you don’t really understand economics like we do” attitude.

Of course, none of the condescending types ever care to qualify their condescension with asterisks denoting that the government has, numerous times over the years, recalibrated the calculus used to calculate the inflation rate.

When cost-of-living-adjustments in the various welfare and entitlement programs are tied to changes in the rate of inflation in the Consumer Price Index, well, it does D.C.’s check-writers a world of good to keep the official CPI as low as possible, even as real inflation rages.

And it is raging.

I don’t care that the official June CPI came in at a 2.1% annualized rate. I’ve seen the effects of the real rate in my own life, and those who believe in the official rate have the same grip on reality that my son had when he thought Scooby was a real pooch.

My homeowner’s insurance is up double-digit amounts.

My cable TV bill is up mid-single digits.

My utility rates are up. The water and sewage went up. The pest-control and termite contracts are each up nearly 10% this year. Milk is way up. The price of beef is higher. Thanks to the wisdom of Obama (or lack thereof — read, “lies”) and his loony henchmen, Pelosi and Reid, even my health insurance rates are costlier.

About the only cost that hasn’t changed is my mortgage …

But, oh wait! The government has conveniently calculated that metric into the matrix of inflation — all in an effort to make it appear lower than it actually is.

You see, “shelter” accounts for 32% of the CPI, the largest individual category in the index. Two-thirds of the country owns a house, the great bulk of which are owned outright or by way of a fixed mortgage rate — meaning, the single biggest category of the index (which, as I’ve explained, is an artificial calibration designed by the government) barely budges.

Meanwhile, food and energy costs, which are rising dramatically, are considered “volatile” items because they bounce around so much, and so they’re disregarded in the calculation of the core index.

And that “core CPI” — it’s based on fixed costs like housing that rarely change for the vast majority of people, while food and energy costs that everyone pays (and which, combined, are 24% of the index!) are cast aside because they vary too much. How convenient!

The brilliance of government statistics is astounding — if not perversely manipulated.

The Source of Our Nascent Inflation … and Your Salvation Against It

John Williams, one of the rogue econo types for whom I have great respect, has been tracking the inflation rate as the government used to report it. He runs ShadowStats, a website that provides “analysis behind and beyond government economic reporting.” According to John, if Uncle Sam used the same CPI calculation he employed in 1990, readings today would be near 6% — triple the current.

And if our good Uncle deemed legitimate his 1980 calculus, the June CPI reading would be hair below 10% — five times the level given by the modern, adulterated calculations.

But even though those calculations are manipulated, they nevertheless show that inflation is resurgent today. After months and months of readings that were negative, flat or up no more than 0.2%, the so-called CPI All Urban Consumers reading is consistently showing year-over-year changes in inflation of 0.3% and 0.4% — or an annualized rate of 3.6% to 4.8%.

Why is this happening, particularly given that the Fed is actually taking money out of the system now (anti-inflationary) instead of flooding it with even more dollars (inflationary)?

It’s simple — higher minimum wage leads to inflation.

Consider all those efforts in the last six months or so to boost minimum wages. The National Association of Business Economists reported this week that the share of U.S. companies raising worker pay has more than doubled in the past year to 43 of the firms surveyed. More people earning more money means more money chasing generally the same amount of goods — the classic formula for inflation.

Companies are now raising prices because demand allows them to, and wage pressures require them to in order to maintain profit margins for owners and shareholders.

Which means those minimum-wage workers will very soon discover that their new minimum wage has them pretty much in the same bind as their previous minimum wage …

Which is why addressing America’s issue with income inequality through minimum-wage increases will never succeed. Raising the minimum wage doesn’t get you a middle class. It gets you inflation.

And we are now getting what we’re sowing.

Today’s investment takeaway: The dollar faces renewed headwinds as wage-induced inflation emerges … which means renewed vigor for gold, since gold and the dollar move in opposition. Own bullion; it’s cheap. Own major gold producers; they’re cheaper. Own pre-1933 collectible gold coins; they’re safe from potential confiscation.

Until next time, stay Sovereign …

Jeff D. Opdyke
Editor, Profit Seeker

The Sovereign Investor