Inflation matters to main market participants, especially low-income people

The US Labor Department said that the consumer price index (CPI) rose 5.3%% in August from a year earlier. This high inflation devalued the real wage. According to the Wall Street Journal, the lowest-paid Americans’ real wages fell 0.5% at the same time because their wage increased by only 4.8%.

The CPI data is controversial too. The data showed that housing and rent costs increased by only 2.8% over a year. In contrast, S&P CoreLogic Case-Shiller national home price index said that home prices rose 18.6% annually in June. Other data also showed that rent increased by two digits annually. It means that the CPI calculation failed to capture the housing cost and rent increases. Therefore, the CPI data underestimated inflation.

Jeffrey Gundlach replaced the CPI shelter component with another national housing price index to calculate the real inflation. According to his calculation, the actual CPI should be 12%, which means that the lowest-paid Americans’ real wages fell 7.2%.

Because this high inflation devalued the lowest-income people’s wages, their lives would be poorer. However, wealthy people face a different reality. For a year, S&P 500 index rose by 31%. That means the real return from stock markets is 19%. At the same time, homeowners have also enjoyed 6.6% real gains.

This phenomenon makes me doubt American capitalism. In the past, Americans believed that if they worked hard, they could achieve their dreams. Many politicians promised to restore this ‘American dream.’ However, the American dream does not seem within reach anymore. American labour value is fading. Instead, capital value is rapidly rising. As a result, how much capital you inherit is more important than how hard you work.