No Wage-Price Spiral if Wages Refuse to Spiral
1. "I’ve taken to looking at the Billion Price Index, which looks a lot like the goods-only, but with much higher frequencies. And right now the BPP index is clearly indicating that the big price bump of early 2011 is fading away."
2. "And taking the longer perspective, you can’t have a wage-price spiral if wages refuse to spiral; and all indications are that wages are being held down by high unemployment, never mind gas and food prices (see chart above). But there’s nothing here to suggest any reason to consider inflation a problem."
MP: Here are a couple of points about the graph above, showing annual wage increases in the BLS series "Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private" (data here). Krugman shows a graph of the same annual wage inflation data over a shorter period of time.
1. There has been a downward trend in annual wage increases since 2007, when wages were increasing at an annual rate above 4%, compared to only 2% for the most recent 12-month period through March 2011.
2. These are actual market-based hourly wages, and therefore not subject to the measurement issues that are frequently cited by those who think the CPI significantly overstates or understates actual inflation.
3. The chart also shows that the inflationary episode of the 1970s and early 1980s in the U.S. was accompanied by rising wages which peaked out at an annual increase above 9% in 1981. Since wages are simply the price of labor, and because inflation is a general overall increase in prices in general and on average, it would follow that rising inflationary pressures would have to include rising inflationary wage increases, which we haven't seen yet, as Krugman observes.
As I concluded before: It would be historically unprecedented to start experiencing rising inflation in 2011 with stagnant wages, and unless and until we start seeing rising wages we might not see higher inflation this year.
13 Comments:
Maybe that's true, but the '70's and the '80's didn't have the same level of international economic interaction as today. Wages in China are rising at about 20 percent per year, and the fact that they are still considerably below those of other nations in the region that might be considered viable alternatives for manufacturers just means that they may have even further to rise. It's not just US wages that we need to worry about as increasing wages there will "push through" to prices here, just ask Wal-Mart CEO Bill Simon.
Of course, all of that may be temporary given China's recklessly increasing capacity, but at least for the short term things on the inflationary front look bleak.
WageStagFlation?
"It would be historically unprecedented to start experiencing rising inflation in 2011 with stagnant wages, ..."
I guess you've adopted the Fed's position that it doesn't matter if food and gasoline prices are rising, because people are making less money, their houses are loosing value, and consumer electronics prices are the same. It all balances out, so no inflation.
Oh, the magic of modern macro-economics!
LOL.... The spiral is prices. Wages are stagnating or shrinking. In my day, it was the worst of things and called Stagflation.
No inflation then how does one explain how gasoline has gone up a buck per gallon over the last six months?
No inflation then how does one explain why the USDA show prices have been increasing?
It would seem to me that disallowing food and fuel as part of the core inflation report is nothing short of delusional or political...
In the the inflationary 1970s and early 1980s all prices, wages and interest rates were going up together in-synch: energy prices, food prices, clothing, the CPI core less food and energy, wages, house prices, short-term interest rates, long-term interest rates, mortgage rates, prime rate, etc.
Right now we have a mix bag of rising prices (food and energy), falling prices (natural gas, clothing, eggs, and housing), stagnant wages, low increases in the core CPI, low interest rates, etc. That mixed bag does not necessarily lead to overall price-wage spiral like in the 1970s.
We also had double-digit M2 growth for most of the 1970s and early 1980s, and now we have M2 growth less than 5%.
“There has been a downward trend in annual wage increases since 2007, when wages were increasing at an annual rate above 4%, compared to only 2% for the most recent 12-month period through March 2011.”
The downward trend in wages is older than 2007.
Real Wages 1947-2000
"That mixed bag does not necessarily lead to overall price-wage spiral like in the 1970s"...
Ahhh, I do remember the seventies quite well and here in the St. Louis area fincancially it feels quite similer...
None the less your explanation helps a lot, thanks...
Excellent post by Dr. Perry.
Inflation, schmaflation.
Can we worry about something serious?
People in the 1970s said you couldn't have high inflation and unemployment because of the Phillips curve. But we did.
Mark: If you are citing Krugman as authority in support of your argument, perhaps you should rethink your argument.
Businesses expect taxes and costs of hiring to go up. Of course they are not hiring. Also, what has been the effect on businesses of minimum wage increase?
However, government is hiring and paying big bucks. Tell me this is not inflationary?
Actually, the total number of Government employees has been falling and is at the lowest level since mid-2007.
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