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Of course he is not entirely wrong. Wage inflation always follows monetary inflation, as workers try to raise their incomes to compensate. Some workers then indeed succeed in shifting some of the inflation to others by raising their wages. Of course as long as they succeed, total inflation continues. Wage inflation is hence simply a multiplier of the original monetary inflation.

The fact that it is lagging is a hence good sign, as that means that at least we are winding the multiplier down.

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Except in this particular case he IS wrong.

What you are describing is the wage price spiral--a theoretical construct where consumer price inflation fuels wage inflation which fuels further consumer price inflation.

While it is true that the first big burst of inflation in the mid 1970s did produce a surge in wage price inflation as measured by Average Hourly Earnings of Production and Nonsupervisory Employees, Total Private, there is no evidence of a positive feedback loop between consumer price inflation and wage inflation in that initial inflationary episode.

https://fred.stlouisfed.org/graph/?g=Wwc0

There is also no corresponding surge in wage inflation when consumer price inflation heated up a second time in the late 1970s.

In other words, even during America's prior experience with high inflation, the wage price spiral did not happen. The data does not support that a wage price spiral has ever happened.

In the post-pandemic inflation surge, there is a surge in wage inflation using the same Average Hourly Earnings of Production and Nonsupervisory Employees, Total Private metric as for the 1974 inflation episode (the broader wage inflation metrics don't go back that far). The lag between the uptick in consumer price inflation and wage inflation is approximately 4-5 months.

https://fred.stlouisfed.org/graph/?g=Wwcd

However, wage inflation peaked in March of this year, a full three months BEFORE consumer price inflation peaked.

Once again, there is no evidence in the data of a wage price spiral effect. No indication that rising consumer prices are fueling rising wages which are fueling rising consumer prices. No positive feedback loop. For that to be happening wage inflation would have to be continuing to rise.

Workers seeking enough earnings increase to retain the purchasing power of their pre-inflationary wages are not driving continued high inflation. More importantly, it is questionable if wages have ever driven consumer price inflation in that fashion.

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You are right if you are suggesting that inflation as we have now is multi-facet. Most of it is the chronic money printing due to too low interest rates and special covid stimulus bills. Other large factors are the reduction of American oil and the war and political actions related to it. Also wage inflation as a result of created shortages due to the covid measures. These are winding down and hence so is a part of that wage inflation. So it makes sense that peak is behind us.

But still unions all over the world are now asking for higher wages with the literal argument that inflation forces them. And you and I will do as well, when we have the chance. When cost are rising people are more inclined to have higher wages than princes are stable, especially when jobs are easy to find. Wage inflation doesn't have to be a spiral, or more exact doesn't have to be an increasing or stable spiral. Most of the time it is a winding down spiral. But it is still a multiplier.

Hence why I said he is not *entirely* wrong. :-)

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Look again at the second graph.

https://fred.stlouisfed.org/graph/?g=Wwcd

It shows wage inflation DECREASING. More importantly, it shows wage inflation decreasing BEFORE consumer price inflation peaked.

Which means it is mathematically impossible for rising wages to be contributing to current and future consumer price inflation.

If the Fed said wage inflation was a factor in 2021 consumer price inflation, they'd have a point. They are not saying that. They are saying that wage inflation is a factor in 2022 consumer price inflation.

The data says they are wrong. Entirely wrong.

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But slowing down still means moving forward.

I'm merely stating that when inflation is high, people tend to ask for higher wages. Unions have vocally reported that they are asking for higher wages because of inflation. And that is pretty 101. And as long as there is labor shortage - and there still is in many sectors, especially the extremely price sensitive low wage sectors like retail and fast food - there will be strong upwards price pressure.

Wages are still going up. It is just that the price pressure is less than it was during the forced labor shortages due to mandatory covid-throttle placed on many sectors. So the fact we peaked only means throttle-induced inflation was larger than the current inflation-response wage increases.

But a > 4% labor increase year over year is still huge, and we both know that did not all happen in 2021. That is still happening today. As said, low wage sectors are still desperate to get workers and offering 10-20-30% wage increases just to get workers. I still see major chains shut down and reducing hours simply because they cannot keep the joint staffed.

In fact that may be the only real counter-argument I can think off. If you look at the second graph you quote you see a HUGE increase in average hourly wages right when covid hit. Of course we all know that is in large part because we mandatory fired all the low wage workers in many sectors. Actual wage increases in early 2020 were not high, but a 'work from home' person just earns a lot more than a fast-food operator. If we look at the labor market today, we see that part-time or more exact 'irregular hour workers' have not rejoined the labor market everywhere or at least not fast enough as the end of covid measures would have allowed. So the average mix of workers is today still slanted towards these higher earnings jobs. So wage inflation may be overestimated. (Then again, then it may now also only be going down because of many layoffs in high wage jobs ...)

It will be interesting to see what will give. Will these workers return? Or will employers give up and go the European way by automating (e.g. construction prefab like in most of Europe) and eliminating (the grocery bag packer, walmart waver, "just wait longer before getting a waiter/check", restaurant water bringer, stores close at 6pm and weekends, etc) the jobs away. How much are Americans willing to pay for a fast cheeseburger or being able to shop past 6pm and weekends?

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"when inflation is high, people tend to ask for higher wages."

That makes consumer price inflation a driver of wage price inflation, not the reverse.

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Yes, that is what I said in my initial reaction. It is a multiplier.

(The multiplier can be <1 of course. it doesn't have to be a spiral like in classic cases.)

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Nov 17, 2022Liked by Peter Nayland Kust

I'm reading it that they are blaming "bosses." In other words, business people.

So they are saying business people are being "greedy" by being too generous?

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Either way you look at it, the Fed's way to solve inflation is to keep people's wages down.

It's not the Fed's job to say how much people should be earning.

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Nov 17, 2022Liked by Peter Nayland Kust

Before the lunatic lockdown, the average hours wage I paid my employees was $15 (Canadian). When our benevolent buffoon masters opened up what was not theirs to close, it shot up to $19. It continues to wreak havoc on my cost flow and structure. It's as if employees noticed there was a labour shortage and leveraged it to their advantage. We had to pay.

Few are worth the $19 and I wonder if there will be a price wage adjustment.

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When there is a labor shortage, wages are going to rise. In a free market, that is what is supposed to happen.

In the United States, the apparent labor shortage is demonstrably attributable at least in large part to the lockdowns pushing workers to the sidelines and out of the labor force. Many have still not returned, and the rate of growth in the cohort of people not in the labor force has outpaced the growth of both the civilian noninstitutional population as well as the labor force itself.

There is no structural reason why people are not returning to the labor force. Most pandemic restrictions in most parts of the country have been eliminated. The barriers that did exist in most regards no longer exist. Yet people are not returning to the labor force.

The result is a smaller labor pool than otherwise would be the case, and thus upward pressure on wages.

It's an arbitrary and fundamentally manufactured shortage, but it is still a shortage, it still pushes up wages, and that shortage is not at all due to excess money sloshing through the system.

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Nov 17, 2022Liked by Peter Nayland Kust

What a bunch of tools.

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It merely underscores what I've been saying for quite some time now: The Fed does not have any control over what consumer price inflation does or does not do.

Despite the insistence of die-hard Austrians who want all inflation to be the result of money printing, the data just does not bear that out. If all consumer price rises were due to excess money, the inflation curve would resemble the money supply curve--and it doesn't. Not even a little bit.

There are forces pushing prices up besides the money supply or the velocity of money. The excessive money printing of the past decade surely doesn't help, but, as the stubborn refusal of interest rates to follow inflation, money alone doesn't account for consumer price rises.

But the Fed dare not admit that, otherwise they'll have to answer the question of why they pushed the economy into recession in the first place.

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