Update: No Wage-Price Spiral if Wages Don't Spiral
The graph above shows two monthly series back to 1965 (data here): a) annual wage increases in the BLS series "Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private" (blue line), and b) annual inflation calculated from the Consumer Price Index (red line). Here are some observations:
1. There has been a downward trend in annual wage increases since 2007, and wage increases have been below 2% for the last six months starting in October 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 both rising wages and rising consumers prices, which both peaked in 1980-1981; CPI inflation peaked at 14.6% in 1980 and wages in 1981 at 9.4%. Since wages are simply the price of labor, and because inflation is a general overall increase in most prices, it would follow that rising inflationary pressures would generally have to also include rising inflationary wage increases, which we obviously haven't seen yet. In fact, wage increases have been falling since 2007 as the graph and data indicate.
Bottom Line: As I concluded about a year ago, it would be historically unprecedented to experience rising inflation in 2012 with stagnant wages, and therefore we can assume that unless and until we start seeing rising wages on the order of 5%, we won't see higher inflation this year. That is, we can't have a 1970s-style inflationary "wage-price spiral" if wages are stagnant.