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Thursday, June 18, 2015

'Wage Increases Do Not Signal Impending Inflation'

This note from Carola Binder was intended for the Fed meeting earlier this week, but it applies equally well to meetings yet to come:

Wage Increases Do Not Signal Impending Inflation: When the FOMC meets..., they will surely be looking for signs of impending inflation. Even though actual inflation is below target, any hint that pressure is building will be seized upon by more hawkish committee members as impetus for an earlier rate rise. The relatively strong May jobs report and uptick in nominal wage inflation are likely to draw attention in this respect.
Hopefully the FOMC members are aware of new research by two of the Fed's own economists, Ekaterina Peneva and Jeremy Rudd, on the passthrough (or lack thereof) of labor costs to price inflation. The research, which fails to find an important role for labor costs in driving inflation movements, casts doubts on wage-based explanations of inflation dynamics in recent years. They conclude that "price inflation now responds less persistently to changes in real activity or costs; at the same time, the joint dynamics of inflation and compensation no longer manifest the type of wage–price spiral that was evident in earlier decades." ...

    Posted by on Thursday, June 18, 2015 at 10:15 AM in Economics, Inflation, Monetary Policy, Unemployment | Permalink  Comments (31)


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