What happens when there are supply shortages and businesses run at maximum capacity? When the economy is zooming ahead quickly and supply shortages occur the cost of products increases and so does inflation. As inflation increases the overall value of a dollar declines and people have less disposable income to spend on discretionary products while spending more for basic household items because they have to conserve on their dwindling earning power.
According to JP Morgan Chase & Co.'s PMI report global growth will be around 4 percent. This means more people are buying products and people will need to manufacture more to fulfill growing consumer demand.
This can lead to higher wages and additional hiring. We don't have a large unemployed population so whatever cushion within the system is likely to be sucked up quickly. After that slack is gone wages begin to increase.
Some will benefit over others. People highly skilled, or with specific training, will find their skills worth more while those who do not have advanced skills will start to see their earning power decline without new training programs. The gap between those who have and those who don't will lessen.
As inflation picks up the government is also likely to use interest rate hikes in their tool kit to slow down the economy and in turn inflation. There is a healthy balance where wages rise but inflation is still low that leads to improved earning power. A very difficult window for any government to maintain for long.
Another problem is that most employers don't raise wages fast enough to match the lost earning power. The reasons for this are based in a sticky economy and the insecurity of raising wages that will lead to increased costs. Productivity, skills, and innovation can justify wage increases.
For most of us, we will continue to have the pleasure of losing 3-5% of our income every year while doing more because of increased work demands based on production pressure. As increasing demand rises it would be beneficial for Americans to think about improving productivity, narrowing the wealth gap through raises, returning investments back into the U.S., and seeking to gain market share so they can squeeze out foreign competitors when the market slows down.