Wage-Price Spiral? We're Not Even Close.

Brian Wesbury in the WSJ last week:

The most painful and frustrating economic policy blunder of the past 50 years was the Great Inflation of the 1970s. Painful, because it was the catalyst for three damaging recessions (1973-75, 1980, 1981-82, see shaded areas above), all the while eroding living standards and seriously undermining confidence in America.

Today, the U.S. (and through it the world) faces its greatest threat from inflation in 30 years. And as in the past, this threat is being met with denial and political expediency.

I have argued against the "inflation threat" in posts here, here, here, here and here, some of which have made the case that for inflation to be a real threat, we would have to see both measures of inflation rising simultaneously: headline and core, which hasn't yet happened.

Another variation of this argument is that for inflation to be a threat, we could have to see simultaneous increases in: a) headline inflation, b) core inflation and c) wage inflation, which certainly did happen in the 1970s, but is not happening now.

The chart above shows the year-to-year percentage increases in the monthly wage series "Average Hourly Earnings: Total Private Industries" (BLS data here). A wage is simply a price, the price of labor, and significant inflationary pressure would affect wages just like it would affect the price of oil, food and core prices. Notice in the chart above that wage increases in the inflationary 1970s were between 6 and 9 percent annually for a full decade (the "wage-price spiral"), and far in excess of the 2-4% range during the last two decades. Further, wages increases have been declining in both 2007 and 2008, and are currently at the lowest level (3.4%) since late 2005. Where's the wage inflation?

By definition, inflation is a general increase in the price level, when all goods and services are rising simultaneously, in general and on average. Therefore, for inflation to be a serious threat we would have to see all prices rising, including: a) core inflation (without food and energy) and b) wages, neither of which has been increasing at a rate suggesting that inflation is a clear and present danger.

Bottom Line: Unless, and until, we see core inflation and wage inflation rising, inflation can't be a serious threat to the economy. A wage-price spiral? Not even close.

Related article here, "Inflation's Last Hurrah," in The Economist.

Comments

[CLH:]

Totally true and well stated. Good post.

2008 Aug 25 08:15 AM

[300mph:]

I have to agree with your analysis, up to this point. But if future price increases continue to accelerate like we have seen this year, then there will be unrest in the labor pool and this will inevitably force upward pressure on wages through walkouts and other organized political pressures. Hopefully, if the prices of commodities will stay low, we can avert excess future wage inflation pressures.

2008 Aug 25 10:23 AM

[ain't no fo...:]

Too funny, the author and CLH, his constant loyal lapdog, once more ring the same old - same old RNC bell... "everything's swell, what inflation, what recession, what credit crisis?" all the while ignoring the reality of the fact that the BLS - CPI numbers egregiously and intentionally understate inflation (core or headline).

Here's a little rationality to toss a little reality into the mix:

seekingalpha.com/artic...

I think these guys may wish to consider the age-old saying "Denial ain't just a river in Egypt".

2008 Aug 25 02:26 PM