Serious Implications

The July Simplified Stagflation Index (SFI) is -47, up from from a revised -82 in June.

The July data from the Bureau of Labor Statistics indicates that inflation rose faster than wages for non-managerial workers in the private sector, who make up about 80% of the American workforce. The key data:

Consumer Price Index (CPI) +0.8%
Average Hourly Earnings (AHE) +$0.06 or +0.33%
Average Hourly Wage $18.06/hour

Calculating July’s increase in earnings adjusted for inflation:
AHE – CPI = 0.33-0.08 = -0.47.
July Simplified Stagflation Index = -0.47 X 100 = -47.
12-Month Cumulative SFI = -192.

The 12-Month Cumulative SFI means that over the past year, prices have risen faster than wages for 80% of the workforce, resulting in less purchasing power and less money to save. It also means real wages have fallen 1.92 percent over the past 12 months. Only three of the past twelve months have seen positive SFI values.

The vast majority of Americans are losing economic ground. They can afford less than they used to. Look for continued economic weakness as consumers lose the economic strength to hold up the rest of economy. Investors might want to plan on a bear market.

“The fundamentals have turned out to be worse than I had thought…My advice would be, don’t take any risk…I underestimated in almost every way how badly economic and financial fundamentals would turn out…Events must now be disturbing to everyone, and I for one am officially scared!”

– Jeremy Grantham, MarketWatch August 29, 2008

There’s more about the Stagflation Index here.