Rising salaries are a poor predictor of future inflation
But the dangers that appear in nightmares usually bear little resemblance to the threats worth worrying about in reality. The world’s uncomfortable ride with inflation over the past two years seems to point to a similar conclusion about wage-price spirals: they are a caricature of what happens to an economy with an inflation problem.
In a note in March, Gadi Barlevy and Luojia Hu, economists with the Fed’s Chicago branch, took a closer look at the role of wages in the current episode of inflation. They focused on “non-housing services”, a category that covers everything from car washes to medical check-ups and which Mr Powell regularly cites as a useful indicator because of its tight association with wages.
Adam Shapiro, an economist with the San Francisco Fed, has been even more critical of the wage worries. In a note in May, he isolated unexpected changes in wages to argue that rising labour costs were only a small driver of non-housing service inflation and a negligible one in broader inflation. Like his Chicago colleagues, he concluded that wage growth was following inflation.
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