Wage Inflation Less Likely to be Followed by Price Inflation

07.05.17
Written by Richard Hokenson 

A central tenet of the decision by the Fed to continue to increase the federal funds rate is the belief that a tighter labor market will produce higher wages which will then produce higher price inflation. As Fed Chair Janet Yellen said “we continue to feel that with a strong labor market and labor market that continues to strengthen, the conditions are in place for inflation to move up.” A recent report by Bunker (2017), however, casts doubt on the strength of the pass-through of wage growth into higher price inflation. His chart (reproduced below as Chart 1) clearly shows that the recent relationship between wage growth and price inflation is very flat. It suggests that wage gains could be considerably higher than they are today and price inflation would remain mired at current levels.

   

References:
Bunker, Nick, “Is the Fed being misguided by the Phillips Curve?”, Washington Center for Equitable Growth, (June 21, 2017). http://equitablegrowth.org/equitablog/value-added/isthe-fed-being-misguided-by-the-phillips-curve/

This update was researched and written by Richard Hokenson, as of July 5 2017