Spoiler: Not very much at all
A 1pp increase in the ECI increases the contribution of NHS inflation to core PCE inflation by 0.15pp over four years—an effect of 0.04pp per year. As ECI growth has increased by about 3pp from its pre-pandemic level, this means that labor costs have added approximately 0.1pp to current core PCE inflation.
What are the implications here?
Prices (PCE) have gone up a lot. Wages (ECI) have gone up a little. So logically most of the extra money everyone pays for goods and services (inflation) is going somewhere other than wages…
Coincidentally, profit margins in certain industries have significantly expanded during this same period. It really does look like a lot of “inflation” was more like profiteering, many companies used the panic about inflation to push prices up regardless of actual costs.
It would be interesting to see the analysis done further back. Going back to 1983 doesn’t include the inflationary periods from the 70s and late 40s and early 50s. The 70s was claimed to be a labor cost driven inflationary period, but the early 50s were considered a supply shortage and profit growth inflationary period. 1983 is basically two years after the 70s inflation finally ended.
The author might get more of a “it depends” answer if they included the 70s.
Good point. The conclusions drawn from this data won’t apply to all situations. Then again, the further you go back the less the economy of the time resembles that which we live in today… Regardless I think it’s good to see some hard data rebutting the claims of (the recent spike in) inflation being caused by wage gains. The “Nobody wants to work anymore” sentiment.
Do you listen to Planet Money? They’ve got a recent episode that talks about wage vs profit driven inflation. It’s kinda interesting to hear about how even economists aren’t immune to just repeating the standard line without looking at the data. The tide is starting to turn on opinions about this last round of inflation, and the researcher they interview draws direct lines to the post-WW2 economy.
I mostly listen to Bloomberg’s finance podcasts. Stephanomics, Odd Lots, etc. Really good content there. I think Planet Money has lost its way a little with in-depth analysis.
FWIW I’m not so sure I believe if economists who in the current day primarily focus on depressing wages as a way to break the inflationary spiral are doing so entirely objectively. A large number of these economists are in the employ of companies who benefit from capital vs labor, and would they argue against their own interests?
If this makes me sound like far left wing, I am not really. But I am also not blind to conscious and unconscious bias in commentary.
It is crazy to think that a loss of our moneys value is to be expected and normal. If we used a hard currency such as silver then “inflation” would not be a problem as govetnmyths could not print more at will and devalue the peoples holdings. Governmyth is totally to blame for poverty through taxes and inflation
Your “hard currency” is inherently deflationary. This may seem good to you since it means your dollar is worth more tomorrow than it is today, but the same is true for everyone else’s dollars too. The net result is to discourage spending across the entire economy and that leads to much worst outcomes. There is a good reason that central banks aim for a small amount of inflation rather than zero or negative inflation.
I wonder if zero inflation and a wealth tax would be better. That way, the value of people’s money could be put to use instead of just disappearing over time.
I’m not an economist, just a guy who took all of two econ classes in college. That said, I think there’s an obvious answer to that question. The inflation target is a target. Central banks can’t actually set inflation unilaterally, or we wouldn’t ever see the inflation rates we’ve seen over the last couple of years. This is why we target a small rate of inflation. It’s easy to look at a 2% inflation target in a highly inflationary environment and think that we should be targeting 0%, but we really don’t want deflation.
Not sure what a wealth tax has to do with anything. I’m not inherently against it, but I don’t think it has a significant impact on inflation.
The idea of maintaining positive inflation is to stop people from hoarding money without investing it, right? A wealth tax would also have that effect.
The problem is inflation forces you to take risk just to keep the value of your money the same. If a person doesnt want to take risk they should not be forced to do so. People who wanted to grow their wealth but understand the risks and decide to take them would invest.
I don’t think this is a real problem that people face. If all you want is to maintain your existing wealth, there are a wide range of very low risk options that will get you that. The overwhelming majority want to grow their wealth and take risks accordingly.
