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Uwe Reinhardt: If Budget Chair Paul Ryan Says That it Is Raining, He Is, Instead, _____

Ryan Avent vs. the Pointless Pain Caucus

Inflation Wage price spirals have two spiraling components | The Economist


Inflation: Wage-price spirals have two spiraling components | The Economist: For inflation expectations to begin spiraling upwards, price increases must be sustainable. And for price increases to be sustainable, they must be matched by wage increases; otherwise real purchasing power falls, consumption pulls back, and the economy weakens until prices adjust downward. Given the state of the American labour market, there is very little upward wage pressure, and therefore very little risk of a wage-price inflation spiral. A 2010 IMF  working paper on persistent, large output gaps covered this territory:

This paper studies inflation dynamics during 25 historical episodes in advanced economies where output remained well below potential for an extended period. We find that such episodes generally brought about significant disinflation, underpinned by weak labor markets, slowing wage growth, and, in many cases, falling oil prices. Indeed, inflation declined by about the same fraction of the initial inflation rate across episodes. That said, disinflation has tended to taper off at very low positive inflation rates, arguably reflecting downward nominal rigidities and well-anchored inflation expectations. Temporary inflation increases during episodes were, in turn, systematically related to currency depreciation or higher oil prices. Overall, the historical patterns suggest little upside inflation risk in advanced economies facing the prospect of persistent large output gaps.

One might even go so far as to suggest that the persistence of a large output gap suggests the Fed isn't doing enough.