Wage-Price Spiral? Not Even Close.
Brian Wesbury in the WSJ last week: "The most painful and frustrating economic policy blunder of the past 50 years was the Great Inflation of the 1970s. Painful, because it was the catalyst for three damaging recessions (1973-75, 1980, 1981-82, see shaded areas above), all the while eroding living standards and seriously undermining confidence in America. Today, the U.S. (and through it the world) faces its greatest threat from inflation in 30 years. And as in the past, this threat is being met with denial and political expediency."
I have argued against the "inflation threat" in posts here, here, here, here and here, some of which have made the case that for inflation to be a real threat, we would have to see both measures of inflation rising simultaneously: headline and core, which hasn't yet happened.
Another variation of this argument is that for inflation to be a threat, we could have to see simultaneous increases in: a) headline inflation, b) core inflation and c) wage inflation, which certainly did happen in the 1970s, but is not happening now.
The chart above shows the year-to-year percentage increases in the monthly wage series "Average Hourly Earnings: Total Private Industries" (BLS data here). A wage is simply a price, the price of labor, and significant inflationary pressure would affect wages just like it would affect the price of oil, food and core prices. Notice in the chart above that wage increases in the inflationary 1970s were between 6 and 9 percent annually for a full decade (the "wage-price spiral"), and far in excess of the 2-4% range during the last two decades. Further, wages increases have been declining in both 2007 and 2008, and are currently at the lowest level (3.4%) since late 2005. Where's the wage inflation?
By definition, inflation is a general increase in the price level, when all goods and services are rising simultaneously, in general and on average. Therefore, for inflation to be a serious threat we would have to see all prices rising, including: a) core inflation (without food and energy) and b) wages, neither of which has been increasing at a rate suggesting that inflation is a clear and present danger.
Bottom Line: Unless, and until, we see core inflation and wage inflation rising, inflation can't be a serious threat to the economy. A wage-price spiral? Not even close.
Related article here, "Inflation's Last Hurrah," in The Economist.
9 Comments:
Don't you think that if core inflation actually ceased to be "mostly contained," then the inflation problem would already be out of hand? Inflation expectations would already be unmoored, and perhaps bring with it other nominal variables like interest rates, money supply, and wages. In some sense, waiting for core to start moving is dangerous because if it does, then it will be too late to correct the problem without a significant disturbance to the economy.
Thanks and I really like your blog, Rebecca
You, Sir, are both an idiot and a fool. Too bad such are allowed a voice through blogs, as essayists and especially as teachers.
Let's just keep spending and ignoring the obvious and hope that your university has a good foreign language department. We'll all need to speak several of 'em by the time our country is off the global auction block.
Go ahead and seize the day; it is the future that scares the heck out of the rest of us.
K.
Newcomer to Florida
"You, Sir, are both an idiot and a fool. Too bad such are allowed a voice through blogs, as essayists and especially as teachers"...
Is that you Joe Biden?
Um, you forgot the CPI-U inflation in your chart.
Nominal hourly wages didn't spiral in the '70s (unless you consider 6% to 9% a spiral) and they aren't spiralling today (unless you consider 2% to 4% a spiral). Back of the envelope arithmetic - the 2000's is a greater wage spiral on a percentage basis than the 1970's spiral. Go figure!
My hypothesis: When the CPI-U peaks near the end of this decade, the hourly average wage will be 3% less than the CPI-U just like 1974.
It doesn't bother me when lay people don't understand inflation. But, it is aggravating when economists don't understand inflation. Some economists believe that increased prices of goods = inflation. Inflation occurs when too much money is being spent on too few goods, which drives up prices. When prices go up due to other reasons such as a poor exchange rate between the dollar and foreign currencies, that isn't inflation.
For our current situation of increased costs of goods, the solutions are at the individual and corporate level: substitute cheaper goods, delay purchases, buy only what's needed instead of everything you want, etc.
If we were having true inflation, the solutions are at the government level: stop printing so much money and constrict the money supply by raising the prime interest rate. Since we don't have excess money supply, doing these things now will make our situation worse. The Federal Reserve Board still is worried about inflation and is keeping the prime rate 1% higher than Germany and 3.12% higher than Japan. It should lower the prime rate to 4.5% or less to make it easier to borrow money for corporate needs and for home and car buying.
> Where's the wage inflation?
Mark, without even looking, I predict some socialist jackass is going to whine about "taking advantage of labor" and probably argue in favor of more unionization...
> Newcomer to Florida
You start out with an insult, then rant for a sentence or two about pablum you lapped up from the MSMs, and express your own anti-free speech attitude with "Too bad such are allowed a voice".
What's too bad is that respect for free speech allows idiots like you to blather and froth while saying nothing of substance beyond the revelation of the vast chasm, of near infinite depth, between you and any understanding or grasp of just about everything there is in the universe.
Do us Florida residents a favor, and move back to whatever socialist paradise you came from, you ignorant twit.
-- A Florida Native
If you want to make even a stronger case do unit labor cost comparisons between now and the 1970s.
Housing costs are also down.
Post a Comment
<< Home