Stagflation rears its ugly head!

By John McGory

Stagflation is back.  Stagnant wages and inflation due to increased food and oil prices are combining to create an economy where prices go up while wages remain static.  While 10 percent unemployment figures grab headlines, 90 percent of the workforce lives with the fact that their pay does not go as far as it did a year ago.

The Real Estate Swami says that until wages rise above the rate of inflation, the real estate market will languish. The Swami points to the 1970s and early 1980s as the last time our economy dealt with stagflation.

“Our standard of living continues to erode as the cost of goods and services increase, while wages stand still,” says the Swami.  “Oil price increases in the 1970s during an economic downturn caused a decade of turmoil.  It is unreasonable to think that real estate will flourish in this stagflation environment.”

The hourly earnings of workers in non-supervisory positions have risen by 2.3 percent from July 2010 to last July.  That is a full percentage point below the 20-year average in annual wage increases of 3.3 percent.

In the same time period, the consumer price index increased by 3.6 percent. This means Americans are losing ground in their standard of living. With sustained high unemployment, a growth spike in wages does not seem to be in the cards for the next several years.  The only hope for relief is a significant drop in oil prices, which could decrease consumer prices and stop the slide in the standard of living.

“It is a time of economic retrenchment for all.  While much can be learned from living with less, the huge real estate machine that creates many jobs will remain silent,” remarks the Swami.  “Wealth for the people must be created before sustained prosperity returns.”

The Swami points to the fact that 70 percent of the U.S. economy is derived from consumer spending. If consumers are losing ground to inflation and stagnant wages, fewer products will be consumed.

“Real estate is the biggest item anyone buys.  But we cannot buy if we do not have,” the Swami says.   
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