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Why All the Inflation Worries?

Some respected economists are talking as if the US economy is in serious inflationary trouble. But the current uptick in price growth is highly likely to be a largely benign consequence of the post-pandemic recovery.

BERKELEY – In the past three years, technological advances have provided about one percentage point of warranted US real wage growth each year – admittedly, only half the rate of earlier times, but still something. Yet, real wages are currently 4% below their warranted value from adding on the underlying fundamental productivity trend to the pre-pandemic real wage Employment Cost Index (ECI) level. Does that sound like a “high-pressure” labor market to you?

Those who believe that the US labor market is in some sense “tight” point out that the ECI increased by 3.7% in the year to September – well above its 3% annual growth rate in the pre-pandemic years of former US President Donald Trump’s administration. But, because US consumer prices have increased by 5.4% over the past year, the ECI-basis real wage has fallen by 1.7% in that period. In a high-pressure economy with a tight labor market, workers would have enough bargaining power to obtain real wage increases.

Nowcasting is extremely difficult, and hazardous. But the “now” that I see today is the one I forecasted two to three quarters ago. Yes, the recovering US economy, like a driver who suddenly accelerates, is leaving inflationary skid marks on the asphalt. But, as I argued in May, these should not concern us, because “burning rubber to rejoin highway traffic is not the same thing as overheating the engine.”

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