Wages, prices and controlling inflation in the United States
Prices have risen too quickly since mass vaccination enabled the grand reopening of early 2021. Much of this unwanted inflation can be attributed to specific supply disruptions caused by the pandemic or to temporary changes related to the pandemic in the range of goods and services that consumers wanted to buy.
But rapid wage growth has partly contributed to excessive inflation in the United States – and the importance of this channel is only growing as supply disruptions wane and spending patterns soften. normalize. Wage gains for workers will have to slow if we are to eliminate inflation from the US economy. The ease of this adjustment depends in part on the flexibility of corporate profit margins, which remain exceptionally high.
As I explained at length in previous grades, most of the unwanted price increases we have experienced since the start of the pandemic can be explained by idiosyncratic factors. These forces have made inflation worse than could reasonably have been expected given the fundamental national economic conditions. Nominal national income in Q2 2022 was 5% lower than would have been expected based on the 2018-2019 trend, but the consumer price index (CPI) was 8% higher.
The good news is that the impact of these disruptions should fade as businesses adjust and society normalizes. In fact, it already seems to be happening. Input prices for manufactured products begin to fall as the Federal Reserve Bank of New York index “pressures on the global supply chain” plunges since the peak reached at the end of 2021.
With the notable exception of car dealers, still struggling with the underproduction of new vehicles since February 2020, US Retail Stocks have mostly normalized against sales. The dollar value of retail inventory in August 2022 (the latest month for which we have data) is up 12% since January 2022, while spending at retailers excluding gas stations has increased less than 3%.
The situation looks like further upstream, with US wholesale inventories up more than 14% since the start of 2022 while sales excluding crude oil and refined petroleum products have risen less than 4%. This has brought most I/S ratios back to pre-pandemic levels.
For the most part, these deflationary forces have yet to reach consumers. Prices for durable goods have stopped rising, but before the pandemic they typically fell by around 1% per year. The price index for “major household appliances”, which was a harbinger in the early months of the pandemic, has fallen 8% since the peak in March, although it is still more than 20% above the levels of before the pandemic.
It is therefore reasonable to suspect that unusual but temporary price increases in goods will eventually be followed by unusually large but temporary price decreases. We could also benefit from the normalization of inflation rates for various services that had fallen in price during the pandemic only to then rise upon reopening. Hotel room rates, for example, fell more than 15% during the pandemic, jumped more than 25% upon reopening, and have remained essentially flat since last October. Other services may soon follow.
These developments, if they occurred, would cause inflation to appear Slow down than the underlying trend determined by domestic conditions. Just as it would have been wrong to conclude that the annual CPI inflation rate of 11.1% in the first half of 2022 accurately reflected domestic conditions, it could also be wrong to view a marked slowdown in inflation as a a sign that expenditure and production have regained their balance. Discounting temporary factors may be appropriate, but it should be done in a consistent and transparent manner.
The question is, what will inflation look like once the one-off price spikes and price dips finish making their way through the data? This is not a simple question to answer. But we can be reasonably sure that prices can’t rise too fast (or slower) than incomes for very long – and the biggest source of consumer income, by far, is workers’ compensation.