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Job market is good, but wages aren’t rising as much as cost of living

Life’s good.

By all indications things are going pretty well here in the Treasure Valley and around the state. Jobs are plentiful, new stores are opening up and more people are going out to eat.

At risk, though, is a rise in the cost of all this good living. Beyond measuring economic growth and employment, economists keep a close eye on the level of prices, or inflation.

The Consumer Price Index (CPI) is the most widely followed measure of inflation. The index shows the cost of a basket of goods and services for the “typical U.S. household” relative to the cost of the same items in the previous period.

With this measure the US Bureau of Labor Statistics (BLS) tracks the goods and services a “normal” U.S. household regularly purchases. The index is calculated by holding this basket of goods constant while following price changes for each item. The percentage change in the index thus measures the inflation rate.

The CPI declined 0.1 percent in March, but has risen 2.4 percent over the past year. Here in the West the annual rate of inflation is running even higher. The CPI for urban consumers in Western cities with a population base the size of the Treasure Valley rose at an annual rate of 2.6 percent.

The big question with inflation, however, is whether or not it actually causes harm. A rising price level doesn’t concern the average worker too much if wages are rising just as fast. So here’s the bad news: The BLS also recently reported that average wages in the Boise area rose only 1.9 percent last year.

The second issue of possible concern is that even if the overall rate of inflation isn’t high, the cost of some important living expenses could be rising faster. For example, the BLS reported this month that the cost of housing, or “shelter”, is rising at 3.3 percent per year.

What’s to be done?

In his best-selling principles of economics textbook, Harvard economist N. Gregory Mankiw writes that “prices rise when the government prints too much money.” The increase in inflation is therefore likely to provoke a strong government response. We should expect the Federal Reserve policymakers to continue raising interest rates so as to slow an increase in the money supply.

Things might look good, but a higher cost of living will dampen the excitement unless the Fed acts soon.

Peter Crabb is professor of finance and economics at Northwest Nazarene University in Nampa. prcrabb@nnu.edu.

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