WASHINGTON — All but absent in recent years, inflation is ticking up. Thats to the delight of those who think it signals a return to economic health, to the worry of others who fear it will disrupt financial markets.
Headline inflation the rising prices consumers pay at the pump, grocery, restaurant or shopping mall measured 1.6 percent in April from a year earlier. Its been driven up in part by a harsh winter and drought conditions in some regions.
When volatile food and energy prices are stripped out of the calculation, the so-called core inflation rate was 1.4 percent over the same 12-month period.
Its hardly the galloping 13.58 percent annual rate of 1980 or the punishing 14.65 percent in 1947 after the end of World War II. In fact, its still below the 2 percent inflation target that the Federal Reserve sees as the sweet spot for a healthy economy.
But April marked the first time consumer and wage inflation accelerated together since the Great Recessions end in 2009. If sustained, it could mean workers have more power to demand higher wages in the face of rising prices. And wages chasing rising prices is how an inflationary spiral begins.
Because inflation means a dollar buys less over time, it erodes purchasing power. That is why its return could change the calculation for borrowers seeking a loan, lenders debating whether to grant one, or investors choosing between stocks and bonds.
And since the Federal Reserves response to inflation is to push higher interest rates across the economy, it could complicate payments on mounting U.S. debt. The United States must take out new borrowing to pay for past spending.
All of this is modest, but clearly its the first time (in recent years) that weve had wages and consumer prices going up at the same time in an accelerated way, said James Paulsen, an economist and chief investment strategist for Wells Capital Management.
Paulsen doesnt forecast runaway prices or soaring wages. But because the economy has faced a bigger threat over the past five years from deflation, or the broad fall in prices and wages, returning to a period with inflation is likely to be unsettling. Wages for nonsupervisory workers, 80 percent of the workforce, have been rising at a rate above 2 percent every month since August 2013.
I do see the stars aligning for there to be greater inflation anxiety, Paulsen said in an interview. Weve not had a serious inflation problem in more than 30 years. However, weve had multiple inflation panics over that period of time.
The U.S. economy right now does not seem anywhere near overheating to the point of interest-rate spikes. But there are signs just under the surface that growth is picking up steam.
The sand under your feet moves often before you realize how much its moved, cautioned Paulsen.
He cited the improving unemployment rate, climbing factory utilization rates, strong car sales and an increase in credit extended to consumers.
Other economists see no reason now for concern.
Wage inflation is showing up everywhere but in the data, insists economist Alan Tonelson in his RealityChek blog. Moreover, whatever wage pressures are being felt in individual parts of the economy are much weaker than widely reported price increases in food, higher education, housing and other sectors.
Tonelson noted that even with wages now growing at 2 percent, thats still half the rate of 2007 before the recession. No one claims that overall inflation was raging out of control then, he said.
Some economists think a little more inflation might actually be welcome.
The second we see wage growth, do we really want to slam on the brakes? said Heidi Shierholz, a labor economist with the Economic Policy Institute, a liberal think tank.
Rising wages and prices would signal an economy growing healthier, she noted, adding that if were actually seeing it, it would actually be a positive development for the economy, not just for the families involved.