Economists can talk until they're blue in the face about how there's no meaningful jump in the core annualized inflation rate or the Producer Price Index. But these are merely abstract measurements of what every regular American experiences every day: The pain of higher prices.
Here's the problem: The evidence suggests the pinch on pocketbooks is about to get worse as inflation -- led by food prices and housing costs -- heats up again after a two year reprieve. The pain will be especially acute when you consider that the median full-time inflation-adjusted earnings for men peaked in the 1970s and have been stagnant ever since. No wonder one-in-seven Americans are on food stamps.
Not only will that cause problems for consumers, but it will complicate the Federal Reserve's cheap money stimulus efforts as well.
While not yet overwhelming, price pressures are clearly building. The core Producer Price Index jumped in March over February at the fastest rate since 2011, amid the inflation scare driven by the Arab Spring and its impact on crude oil prices. The increase was broad based, with services prices rebounding.
The Consumer Price Index jumped to a 1.5 percent annualized rate in March -- nearing the Fed's 2 percent target -- due to a big jump in food prices. Crops from oranges to coffee are suffering from low yields and beef prices are rising while the cattle herd is the smallest it has been in generations.
The problem is poised to get worse as a paralyzing drought in California -- a key producer of a variety of fruits, nuts, and vegetables -- worsens. Drought conditions are now plaguing Texas as well as high plains states including Kansas and Nebraska. That's a particular problem for the U.S. cattle herd, as desperate ranchers in California have been trying to relocate animals to Texas and Kansas in search of water, only to find little there as well.
Moreover, one-third of consumer inflation is driven by shelter costs. A drop in the measure back in 2010 is what spurred the Fed to launch another round of bond buying stimulus, dubbed "QE2" at the time. And after holding near a two percent annual inflation rate (which is where the Fed wants it) the measure is pushing towards the three percent level as the recovery in home prices filters into the government's inflation calculations.
This would all be fine if wages were growing faster than prices, but they aren't: The average hourly earnings of production and non-supervisory employees is expanding at around a 2.5 percent annual rate, well below the four percent-plus levels seen at the peak of the last bull market and economic expansion in 2006 and 2007.
Should inflation continue to rise into the summer, the economy will suffer as consumers are forced to pull back. And the stock market will suffer with all eyes still on the flow of cheap money stimulus from the Federal Reserve. Higher prices will limit Fed chair Janet Yellen's ability to hold off on short-term interest rate hikes until the tail end of 2015, as she desires.
The real wild card in all this is the specter of wage inflation, which if it appears, could set off a 1970s-style wage-price inflation whirlwind. Carnegie Mellon economist and Fed historian Allan Meltzer notes that it was the lead up to the "Great Inflation" of this era when we last saw real, inflation-adjusted interest rates as low as they are now. That's a bit disconcerting, and suggests the inflation situation could be vulnerable to an upside surprise if policymakers aren't careful.
In recent speeches, Yellen has repeated her belief that the labor market is soft enough -- given the seven million people working part-time who want a full-time job -- that wages aren't likely to pressure the overall inflation rate anytime soon.
But others are starting to doubt that. On Friday, the U.S. Labor Department reported 288,000 jobs were created in April and the unemployment rate fell to 6.3 percent from 6.7 percent in March.
In a recent note to clients, the team at Capital Economics posited that the labor market could, in fact, be undergoing structural shifts away from full-time, goods-producing jobs into services-based jobs with more flexible work schedules. They note that employment in private services is 3.1 million higher now than in January 2008 (which features an average workweek of 33.3 hours); while manufacturing employment is 1.6 million lower (featuring a 41.1 hour workweek) and construction employment is 1.5 million lower (featuring a 39.1 hour workweek).
If they're right, we could see the economy increasingly dominated by folks working in jobs that carry fewer hours. If so, the labor market has less slack than Yellen believes. And that means wages could start drifting higher.
This is corroborated by the rising proportion of small businesses planning to raise wages in the latest survey by the National Federation of Independent Business. Historically, given the results of the survey, it suggests we could see wage inflation push towards three percent by the end of the year -- well above the Fed's two percent inflation target.
The reason the inflation threat is so grave is that so much depends on a smooth, controlled increase in interest rates over the next few years as the Fed tries to return monetary policy to a more normalized stance. Everything from the housing market, the health of the banking system, and the Federal budget deficit depends on it.
If they lose control, from ongoing droughts and crop failures and/or a tighter labor market, it could complicate the exit from the greatest experiment in cheap money in human history.