No “wage price spiral”— rising wages contribute very little to inflation

Back when , many people were worried about a wage-price spiral. This means that wages were going up, and businesses would have to increase prices, which would lead to more wage increases, and so on.

Now, a  Rising wages, the paper concludes, are only responsible for about a tenth of a percentage point of the increase in the Fed’s preferred personal consumption expenditures price index.

So, not much at all. Why?

The  measures inflation in three categories: goods, housing services — like rent — and the very broad “nonhousing services,” according to Adam Shapiro, vice president of macroanalysis and economic geography at the San Francisco Fed.

“Hotels, restaurants, and then smaller categories, such as airlines, public transportation, haircuts and things like that,” he said.

And that’s where most of the inflation has been happening lately. Labor makes up a huge portion of costs in that category, but Shapiro found that “when a business’s cost structure changes — so if their labor costs increase — they don’t necessarily have to pass on those costs to consumers.”