![]() According to the Commodity Research Bureau Spot Index, commodity prices declined by 26 percent during this six-year period, the largest decline of any other six-year period since the measure was created in 1951. In addition, commodity prices significantly declined during 1995-2001. The expansion in aggregate supply lowered prices, especially of goods. Starting in the mid 1990’s, the US economy experienced a massive expansion of aggregate supply from surges in technology, labor productivity, offshoring, and imports from developing countries. Why didn’t inflation react more visibly to the acceleration in wages in the 1997-2001 period? This could lead some to conclude that the link between wage growth and inflation has broken. In particular, during the 1997-2001 period, the US experienced its tightest labor market since the 1960’s, but the rapid acceleration in wage growth barely made a dent to inflation. In the past 25 years, core inflation has not surpassed 2.5 percent. However, when plotting both inflation and wage growth measures, it is easy to see why some have concluded that the link between the two measures has broken in recent decades. Other things equal, faster growth in costs must lead to faster growth in prices, otherwise businesses would lose profitability. The idea that wage inflation leads to price inflation is very intuitive. Rumors that the Philips Curve (low unemployment rate = faster inflation) is dead have been greatly exaggerated. The remaining questions are whether faster wage growth will feed faster inflation, and what would be the impact of other determinants of inflation. We are now at a very tight labor market, and that this tight labor market is indeed leading to faster wage growth. In my opinion, these arguments are wrong. The slow recovery in wages supported arguments that the labor market is not tight, or that the link between labor market tightness and wage growth has broken. However, in recent quarters, that pace seems to have accelerated. While wages have been continuously growing for several years, they’ve been doing so at a surprisingly modest pace. Thus far, the main reason for the lack of acceleration in inflation has been the unexpectedly long time it’s taken the tight labor market to accelerate wages and labor costs. Other determinants of inflation will not offset the impact of labor costs on inflation.Faster labor costs growth will lead to an increase in consumer prices.A tight labor market will accelerate wages and labor costs.Those who expected inflation to accelerate had the following story in mind: Why has inflation been slow to accelerate? The end of the Goldilocks economy will force the Fed to make a difficult decision: significantly slow the economy down or accept an inflation rate that is clearly above its 2 percent target. We expect that the US economy will slow down in 2019, yet that inflation will move up. In this blog I discuss why inflation has not accelerated much just yet, and why inflationary pressures will rise in the coming year. But so far, inflation has been well contained. Can it continue?Īs the US labor market tightened in recent years, some economists (including myself) have been expecting a rise in inflation to follow. Over the past two years, the US economy has grown at a strong rate without experiencing accelerating inflation a perfect example of a Goldilocks economy. Human Capital Benchmarking & Data Analytics.Diversity, Equity and Inclusion Conference.2023 Change, Transformation & Organization Design Conference.
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