A Quick Clarification on Inflation

There’s lots of talk about wages “causing” inflation.

Hire input costs cause (PPI) inflation. When passed on to consumers, it’s PCE/CPI inflation.

Higher costs & higher living costs cause wage hikes- “not the other way around”.

Offshored costs keep prices & living costs low & wages stagnant, as jobs are dislocated. Low rates & scale enhance the disinflation impulse.

When input costs rise, PPI increases can mean CPI/PCE inflation. It’s true that higher wages are needed to sustain inflation & to prevent demand destruction.  

It’s hard to get unemployment so low that wages rise as a result. Look @ 2019. Low unemployment didn’t cause higher wages so much as it caused skills shortages. Prices didn’t rise- so, wages didn’t rise.

Wage pressures, today, are from frictions, & likely, transitory (though if it lasts too long, it’s hard to reduce wages).

Trying to use wages to “cause” inflation could cause asset bubbles, pricey houses from low rates, a weaker currency, &, thus lower “real” wages for all, & financial instability. The monetary impulse can be disinflationary. Good inflation comes from high demand, then higher costs & wages, not tight supplies from low rates or supply shocks.

This is just a general overview to explain that wages are a “result” of inflation & “sustain” inflation- but aren’t the prime cause or initial impulse for inflation.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s