Succeed in 2006
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How to Succeed 2006: Inflation forecast
Why this isn't the 1970s.
November 15, 2005: 9:07 AM EST
By Pat Regnier, MONEY Magazine
Succeed in 2006

NEW YORK (MONEY Magazine) - Companies may like the idea of passing higher costs on to their customers, but they won't get far if people don't have more money to spend.

That's where the question of wages comes in. Overall, employers' wage costs grew just 2.3 percent over the past year, the slowest growth rate on record. The HR consultancy Hewitt Associates expects salaried workers to bring home an extra 3.6 percent on average in 2006, based on surveys of employers.

That compares with a 4.3 percent gain during boom years. Of course you want your wages to grow.

And you are quite entitled to complain that -- as Sylvia Allegretto of the liberal Economic Policy Institute observes, this corporate stinginess has come at a time when the economy and worker productivity have been growing.

But a raise isn't worth much if it comes with inflation that not only raises prices but erodes your savings. And at the moment, it looks as if the same forces that are holding your pay down are also keeping inflation at bay.

"Your employer's not going to give you a raise just because your home heating bill is going up," says Morgan Stanley economist Stephen Roach. In contrast to 30 years ago, you are pretty unlikely to have a union contract that guarantees automatic wage increases as prices rise. And your company is far more likely to face competition from low-cost overseas producers.

Psychology is at work here too. After years of low inflation, observes Lehman Brothers economist Ethan Harris, "people are no longer used to the idea of demanding cost-of-living increases."

Companies, likewise, no longer expect competitors to raise prices, and so are reluctant to do so themselves. But that psychology, Harris adds, is a bit more fragile now; surveys show that consumers are expecting higher prices, and in this game, anticipation shapes reality.

Disco-era price spikes aren't coming, but you should prepare your portfolio and your savings strategy for higher, but manageable, inflation. (We've got the specifics on how to do this.)

You should also figure that presumed Federal Reserve chairman Ben Bernanke will keep hiking interest rates to try to nip inflation in the bud.  Top of page

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