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Editorial: How inflation and rising wages moderate the economy

BY DI EDITORIAL BOARD | AUGUST 05, 2015 5:00 AM

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Last week, the Associated Press reported that inflation is beginning to hit the United States. It has taken a while, but following the “Great Recession” of the late 2000s, historically low inflation is finally on the rise. And while the Consumer Price Index is trending upward slowly, comparatively low gas prices over the past 12 months have kept it at bay.

Haircuts, eating out, and rent, to name a few things, are all starting to experience price increases, according to AP. While many fear rising prices, these slight increases are actually a sign of a healthy economy. The benefits of inflation become more obvious when considering that it was historically low during the worst economic times since the Great Depression.

Rising inflation certainly has its negatives. Increases for the sake of increases can certainly bring with them problems for the economy. But inflation has many positives and should not be misunderstood and demonized as an economic boogeyman.

A Time article from a few years ago perfectly explained the benefits of inflation. The article discussed former Chairman of the Federal Reserve Ben Bernanke’s desire to “flood the market with cash by buying $600 billion of U.S. Treasury bonds.” As the article noted, people were naturally afraid that this would bring sharp inflation, but what many failed to understand is that this consequence would have been very much intended.

Without inflation, Time argued, consumers will delay purchases indefinitely because there is no fear that prices will rise on them. If one can buy a plasma-screen TV today for $500 and do the same two years down the road without the threat of a price increase, there is diminished incentive to buy today. Conversely, with rising prices, consumerism is constantly being driven up by the fear of rising prices.

Of course, when prices rise, particularly rent, consumers begin to become more wary of their income relative to the Consumer Price Index. Therefore, in order to have a positive effect on the economy, it’s important for rising inflation to be accompanied by rising wages — at least to some extent.

In Johnson County, the battle over minimum wage is in full swing, and a rising Consumer Price Index may prove to bolster those with goals of incrementally increasing the wage to $10.10 per hour.

Last week, The Daily Iowan reported on a push by the Johnson County Board of Supervisors to raise the county minimum wage to $10.10 by 2017. Of course, the supervisors ran into opposition in the form of officials arguing that the increase would not be “strictly legal.”

Differing interpretations of the proposal have shown varying legality, but Iowa Labor Commissioner Michael Mauro said the raise would contradict the Iowa Constitution, which argues the change would be inconsistent with the Legislature.

Whether the change is legal at this time, there is a bigger battle than just Johnson County. An increase in minimum wage — in the county or the whole country — would be beneficial in making people understand the importance of inflation.

The U.S. economy is bigger than any one individual or business, but these are crucial building blocks. For the American public to accept inflation, there just may have to be an associated increase in minimum wage.


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