NEW YORK – A likely contender for the biggest economic drama in the year ahead will be the struggle between rising prices and rising wages, says economist Ken Goldstein of the Conference Board, the business research and networking group in New York.
"Consumers are concerned that wages are not keeping pace with inflation, and managers feel they can't raise prices," says Goldstein. "It's difficult to imagine how both can be satisfied in 2006."
Goldstein says the tension between prices and wages has been affecting more than just transit workers in New York City.
"We see it across the board, in almost every industry we look at," he said.
Prices rose at an annual rate of 3.5% in November; wages were up at a 2.3% annual pace in the third quarter.
In 2006, he recommends keeping close watch on the consumer price index. A strongly rising Consumer Price Index will alarm consumers (who will have to pay more), but allay producers (who will enjoy fatter profit margins). Scaring off the consumer -- whose buying accounts for more than two-thirds of America's gross domestic product -- could have a hard impact on the economy.
Conversely, consumers will cheer a lower growth in the CPI, but producers will worry that they will not be able to balance their costs of materials and labor by raising the prices they charge for finished goods and services. In that case, producers will be paying more for the elements needed in production, such as metals and energy. At the same time, health care and retirement benefits will be driving up total labor costs.
If producers can't raise prices, says Goldstein, they are likely to compensate by downsizing, cutting back production lines and asking employees to bear more of the costs of health care.
Perhaps the greatest factor in determining the outcome of this tension will be worker productivity. Goldstein says that in the past, rising productivity has allowed producers to enjoy reasonable profits without raising prices.
But if real wage growth remains stagnant, workers may have less motivation to spur productivity, and that would lead to labor-management tension of the kind that clobbered New York in the week before Christmas.
"Productivity is the wild card," says Goldstein. "It's the one thing that has kept the tension between prices and wages on a low simmer." But a repeat is far from certain in 2006.