Imaginary Wage-Inflation Conundrum
Let's start with a look at the conundrum expressed in a Tweet.
Confused? Most economists were, especially at Econoday. I wasn't.
There's still no wage inflation underway but the flashpoint may be sooner than later based on unusual strength in the February employment report. Nonfarm payrolls rose an outsized 313,000 which is more than 80,000 above Econoday's high estimate. Revisions add to the strength, at a net 54,000 for January which is now 239,000 and December which is 175,000.
Despite all this strength average hourly earnings actually came in below expectations, at only plus 0.1 percent with the year-on-year 3 tenths under the consensus at 2.6 percent. But given how strong demand is for labor, policy makers at the Federal Reserve may not want to risk runaway wage gains as employers try increasingly to attract candidates.
The workweek further points to strength, up 1 tenth to an average 34.5 hours for all employees with the prior month revised 1 tenth higher to 34.4 hours (the private sector workweek rose 2 tenths to 38.8 hours with manufacturing also up 2 tenths to 41.0 hours in a gain that points to strength for next week's industrial production report).
The unemployment rate held at a very low 4.1 percent as discouraged workers flocked into the jobs market. The labor participation rate is another major headline, up 3 tenths to 63.0 percent and again well beyond high-end expectations.
The sheer strength of the hiring in this report would appear certain to raise expectations for four rate hikes this year as Fed policy makers may begin to grow impatient with their efforts to cool demand.
Conundrum? What Conundrum?
The conundrum is imaginary. It is based on the Phillips Curve, a nonsensical idea, disproved numerous times. Yet, economists still cling to it.
The Phillips Curve, is an economic model developed by A. W. Phillips purports that inflation and unemployment have a stable and inverse relationship.
On August 29, I noted that a Fed Study Shows the Phillips Curve is Useless.
The paper, co-authored by Philadelphia Fed Director of Research Michael Dotsey, shows that forecasting models based on the so-called Phillips curve, which asserts a link between unemployment and inflation, don’t actually help predict inflation.
Their study is timely. Fed officials have been surprised by a deceleration in U.S. inflation over the past several months despite a continued decline in unemployment, the opposite of what the Phillips curve relationship would predict.
“We find no evidence for relying on the Phillips curve during normal times, such as those currently facing the U.S. economy.”
That report is not surprising at all other than a Fed researcher finally admitted the obvious.
There Is No Phillips Curve
Pater Tenebrarum at the Acting Man Blog provides this chart.
Believers Hold Firm
In March of 2017, then Fed Chair Janet Yellen commented in a post-FOMC Q&A “The Phillips Curve is Alive“.
Stanley Fischer, then Vice-Chair also mentioned falling unemployment as a determinant for rising inflation.
Wikipedia offers this amusing comment: "In recent years the slope of the Phillips curve appears to have declined and there has been significant questioning of the usefulness of the Phillips curve in predicting inflation. Nonetheless, the Phillips curve remains the primary framework for understanding and forecasting inflation used in central banks."
Year-over-year wages are only up 2.6%, on average.
The median worker is doing much worse but that data will not be available for over a year.
The latest median wage data is from May of 2016. It shows real median wages decline in seven out of the last 11 years.
For details, please see How the Fed's Inflation Policies Crucify Workers in Pictures.
Weak wage growth has not kept up with inflation, despite the BLS purporting otherwise.
Inflation Is in Assets
There is plenty of inflation, but it's in asset prices.
As a direct result of the Fed's total incompetence in understanding inflation, bubbles are readily apparent in equities, in junk bonds, and in Bitcoin speculation.
No Economic Benefit to Inflation
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
BIS Deflation Study
The BIS did a historical study and found routine price deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.
Deflation Around the Bend
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.
This is precisely why the Fed's expectation of lasting higher inflation is dead wrong.
Stupidity Well Anchored
Inflation expectations may or may not be well anchored, but stupidity sure is.
Extremely destructive asset-deflation is right around the bend.
Mike “Mish” Shedlock