Wage growth is slowing and inflation is cooling and not embedded in the economy

(Dean, Center for Economic and Policy Research, “Inflation Fears and Strong Labor Markets,” Review of European Economic Policy, Volume 57, 2022 · Number 4 · pp. 267–268 · JEL: E31, E52, pg online @ https://www.intereconomics.eu/contents/year/2022/number/4/article/inflation-fears-and-strong-labor-markets.html //um-ef)

This is not just speculation. While the inflation rate has been rising through the first half of 2022, wage growth has actually slowed sharply. The annualized rate of wage growth at the end of 2021 was over 6.0%. In the most recent data, it was just 4.4% using three-month averages. If we just annualized the rate from June alone, it was 3.8%. This is only slightly higher than the 3.4% rate in 2019, when inflation was comfortably below the Fed’s 2% target. The wage data are erratic, so we have to view the exact numbers with some caution, but the direction of change is clear. Wage growth is slowing, not speeding up. We cannot have a wage-price spiral like in the 1970s if wage growth is getting slower, not faster. This is not a good story for real wages (more in a moment), but it means that we are not on the cusp of double-digit inflation. We can also say that inflationary expectations do not seem to be getting embedded in the economy. The breakeven rate of inflation between inflation indexed Treasury bonds and regular Treasury bonds has been falling in recent months. It is now just over 2.3% for 10-year Treasury bonds. Similarly, consumer surveys show expectations of inflation are falling. The wage-price spiral story clearly does not fit the data. Instead, the United States is seeing inflation driven by the same factors as the European Union and the rest of the world. Soaring prices for oil and gas, due to concerns about supply following Russia’s invasion of Ukraine, is a huge part of the story. Similarly, the price of wheat and other agricultural commodities jumped after the invasion. We have also seen shortages of a wide range of products, from apparel to household furnishings and appliances, as a result of supply-chain problems caused by the COVID-19 pandemic. However, we are finally working through many of these problems. Non-car inventories are more than 25% above their pre-pandemic level. The price of wheat has fallen back to its pre-invasion level and oil prices are now back below $100 a barrel, sending gas prices tumbling in the last month. Even used car prices, which had risen by almost 50% since the start of the pandemic, are now headed downward. For these reasons, it is virtually certain that inflation will be much slower in the second half of 2022 and 2023 than it has been over the last year. This means that even if wages increase in a 3% to 4% range, workers will be able to see a healthy pace of real wage growth.