Is Running Hot Inflation Wise and Human?

  • “For me, sometimes a wise and humane policy is to allow inflation to rise even when inflation exceeds the target.” – Janet Yellen
  • For me the weather is perfect when it’s 75 degrees.

Both statements are truthful but sorely lacking in context.

Even though it’s 75 degrees, can I call it a perfect day if a hurricane hits with torrential rains and winds of 150 miles per hour?

Let inflation go up ”above the targetMay have some advantage, but the pace at which incomes move relative to inflation and its effect on confidence is far from negligible.

Yellen’s comments match those of most Fed members who want to see inflation soar.

In this article, we explore the plight of consumers and consider whether letting inflation soar is a wise and humane way to continue the economic recovery.

What is supporting the economic recovery

The robust economic recovery is in part the result of nearly $ 5,000 billion in deficit spending.

To understand how the government has supported the economy, consider the graph below. The orange line is total personal income. After the release of the second round of direct payments to citizens in March, personal income was 25% higher than before the pandemic. The blue line shows organic income, or that earned only through employers. The difference, the gray area, is government payments, called transfer payments. These direct benefits have accounted for almost a third of revenue on several occasions over the past year.

Personal income table

Personal consumption represents almost two-thirds of economic activity (GDP). Over the past six months, consumption has been boosted considerably by stimulus programs. In addition, the government allowing forbearance from rent, mortgage, student loan and utility payments provided a lot of extra money to spend.

Resulting from the surge in incomes and the reduction in liabilities, they are about 15% higher than the trend of the previous decade. For a context of historic recession, consider that retail sales fell about 13% from their trend during the 2008 recession.

Retail sales

Retail sales

With the rapid reopening of the economy, the government is handing over the stimulus to consumers. As such, the strength of wages and employment, the means with which we consume, are decisive for the recovery to continue without enormous support from Uncle Sam.

Atlanta Fed Salary Tracking

The data and charts in this section and other informative data are sourced from the Atlanta Fed Wage Tracker website.

When wages rise, consumers have more confidence in their financial situation and are more willing to spend. is vital for the continued economic recovery. The data and charts highlight recent salary trends, allowing us to gauge potential changes in consumer confidence as we move up.

The first chart below shows that wage growth was in the 3.5-4.0% range for a few years before 2020. Since the pandemic, wage growth has gradually declined.

Atlanta Fed Salary Tracking - Annualized Wage Growth

Atlanta Fed Salary Tracking – Annualized Wage Growth

Despite the decline in wage growth in 2020, wage growth has exceeded by around 2%, as shown below. This is because inflation was below the average of 1.3%. Unfortunately, the growth in real wages (after inflation) from 2020 has been erased. In 2021, the CPI operates at an annualized rate of 5.4%, eclipsing wage growth.

Atlanta Fed Salary Tracking - Average Salary vs. CPI

Atlanta Fed Salary Tracking – Average Salary vs. CPI

The following chart shows that wage growth declined in 2020 for all categories except workers paid by the hour. The trend continues in 2021 as all classifications are down.

Percentage of individuals with zero wage growth

Percentage of individuals with zero wage growth

The takeaway from the charts above is that wage growth is declining and inflation is accelerating. As a result, as the first bar chart shows, real wages are falling by around 2% this year.

Figure 3 below shows that the percentage of those who do not receive a pay raise has increased since 2020, after having tended to decline over the previous decade. The growth in median wages is also declining, as is the growth in average wages shown above.

Distribution of individual wage growth

Distribution of individual wage growth

Figure 2 below shows that average wage growth is declining at all income levels.

inflation, is “hot” inflation wise and humane?

inflation, is “hot” inflation wise and humane?

Finally, we add another important consideration. The above series of charts focuses only on those with a job. Outside of data, nearly 10 million people have lost their jobs in the past year and a half

Remove the drive wheels

Like riding a bike for the first time, confidence is imperative once your teacher lets go and pushes you forward. Confidence, along with balance, allows the rider to pedal forward and at increasing speeds. New riders often lack confidence in their abilities and fall several times before accelerating.

The government is depriving consumers of critical support at a rapid pace. There are no more direct controls, unemployment benefits expire and the rules of abstention come to an end. Consumers must start peddling at a rapid pace to keep the economy going. Like riding a bicycle, confidence will play a critical role for the transfer of government to be successful.

The survey, shown below, is improving but shows that confidence is not what it used to be.

University of Michigan Consumer Sentiment Survey

University of Michigan Consumer Sentiment Survey

Atlanta Fed charts show wages are actually falling. Recent BLS data confirms the message. Real average weekly and hourly earnings fell 2.2% and 2.8%, respectively, year over year.

Is it time for the Fed to promote policies that effectively reduce wages through inflation? We find it hard to believe that consumers will be excited to spend when their wages aren’t going as far as they used to be.

Let’s go back to the quote from Janet Yellen. Is inflation wiser in such a precarious part of the recovery? To paraphrase, is it in our best interests to undermine consumer sentiment?

Is inflation human?

In terms of her characterization of a more humane inflation, we have choice words for Ms. Yellen.

In, we quantified how low-wage workers are most affected by rising inflation. To witness it: “Taking into account only food and accommodation, two necessities, the most modest classes saw their annual expenses increase by 6.05%. The highest income groups saw their spending increase by 2.10%.

There is nothing human about reducing the purchasing power of a large majority of citizens. What can we hope to gain by reducing the economic situation of the majority in favor of a few? In addition, the growing inequality of wealth does not build confidence, quite the contrary.


The Atlanta Fed and BLS show that wages don’t keep up with inflation. While nominal economic data may improve due to the effects of rising prices, inflation-adjusted data, which is the reality we all live in, does not.

It is now common to hear people complain about the steep rise in prices. Social and traditional media are fanning the flames as they increasingly spotlight inflation. While some consumers may take inflation with a grain of salt, many others are likely to become more frugal.

Consumer confidence is vital to keeping the recovery going.

So, with the proper context, do you think higher inflation is wise or humane?

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