In a recent CD post, I posed the question: "Can We Have Inflationary Pressures Building in the U.S. With Falling Home Prices and 2% Wage Increases?" I also recently observed on CD that "MIT's BPP Monthly Inflation Rate Has Been Falling." Little did I know that I was apparently channeling Paul Krugman, or maybe he's channeling me now (kinda scary either way), because he makes the exact same two points on his blog today:
- "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."
- "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."
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.
- 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.
- 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.
- 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.