Inflation may have peaked. The Fed must act with caution.
In short, it might help to reframe the CPI news.
The newspapers could very well have published this much duller headline: Inflation has remained stable, well below its peak in October.
Not a wage-price spiral.
When inflation becomes deeply worrisome, it is usually because a “wage-price spiral” has set in, with workers reacting to price increases with demands for even bigger wage increases, and so on.
But that hasn’t happened so far.
Yes, after years of rising corporate profits and meager increases, many workers these days carry more weight and demand more pay. Why shouldn’t they?
Pandemic-induced labor shortages appear to have accelerated business investment in capital goods like computers and software that boost productivity, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said Wednesday. research company, during an online conference.
This could produce a happy confluence of events: rising wages, offset by rising productivity, while inflation recedes, thanks to the Fed and the easing of the effects of the pandemic.
Let’s hope so.
The alternative, a veritable wage-price spiral fueling runaway inflation, is something the United States has not seen since Paul A. Volcker served as Fed Chairman from 1979 to 1987. inflation out of the national psyche.
In a new paper, Yale economist Ray Fair uses his long-standing econometric model to test the effects of Fed rate hikes. In a phone interview, he said his conclusion was: “If the Fed were to cut, say, 5 percentage points of inflation and try to do it all in a year, that would be a lot more disruptive than most people don’t think so.”