During inflationary times, Americans tended to see rising prices as an outrage, but swelling paychecks as well deserved. Well, the outrage of rising prices is a non-issue, but what about pay raises?
“Inflation is like a narcotic,” German finance minister Karl Schiller said more than 25 years ago. “For a while, it puts us in a high mood, glorifies the world, and helps us forget our problems.”
The drug is gone.
Consumer prices in industrial countries rose less last year than any year since 1955. In the past 12 months consumer prices rose just 1.7%. Already, Social Security cost-of-living increases look puny — a mere 1.3% for this year.
Living in a low inflation environment takes some getting use to. Workers traditionally expected healthy raises to compensate for the ravages of inflation. Young couples bought more house/car than they could afford anticipating that their incomes would grow enough to tote the load. Buying any and everything on credit was OK because wages would rise to meet the challenge. Savings were considered low priority due to the eroding effect of inflation.
To put all this in perspective, a survey conducted in 1996 found that 84% of the public felt that preventing high inflation was as important as preventing drug abuse or deterioration of schools. Conventional wisdom tells us that high rates of inflation damage the economy by distorting markets, undermining public faith in government and forcing all sorts of wasted effort. The Labor Department says that only 20% of major union contracts include an automatic cost-of-living adjustment, down from 60% in the early 1980s.
The corporate environment is also being influenced by low inflation. Boosting sales and profits to “record” levels is more difficult without the benefit of inflation. Many executive compensation packages depend on reaching ever higher levels of corporate financial success.
Income tax collections lag as taxpayers remain in lower tax brackets. Truth is, government has grown to depend on inflation for ever increasing revenue. Politician’s propensity to announce future spending projects to be paid with inflated future tax revenue has been the norm.
In spite of the dubious condition of the world economy, U.S. economists see no threat on our horizon. Stock market performance has routinely broken records and predictions. Corporate earnings are impressive. Unemployment is almost nonexistent.
All of us old-timers know that an economic correction is inevitable but economic indicators do not validate that assumption. What’s a body to do?
RIDING THE WAVES
Herein are a few suggestions for riding the economic tidal wave and surviving the eventual “correction.”
1. Stay invested in a diversified portfolio of stocks. The gains you’ll forfeit by sitting it out on the sidelines will more than be compensated for gains from being in the market. Investors ultimately win; market timers almost always lose.
2. Get out of debt. Adopt a Depression-era mentality against personal debt. Buy with cash. Being debt-free is never a bad idea, particularly during uncertain times.
3. Concentrate on your career, however modest it may be. Keep your skills up to date. Make a contribution in your job beyond your employer’s minimum expectations. Consider a career change to benefit from the favorable employment scene resulting from low unemployment.
THOUGHT FOR THE MOMENT
Anyone, then, who knows the good he ought to do and doesn’t do it, sins.
— JAMES 4:17
Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. His e-mail address is email@example.com.