In this Letter I summarize what research can tell us about whether or not wage data are, in fact, informative for future price inflation. Overall, the literature suggests that wages do not provide significant additional information beyond what can already be gleaned from other sources, including prices themselves.
These results do not imply that wages and prices are unrelated. Certainly they are tied together in the long run, and wage data will surely contain some information for future price inflation. However, after incorporating information from prices and activity measures, the marginal additional benefit of using wage data appears small.
What are the implications of this evidence? Figure 2 shows various common ways to measure wage pressure. Some of these measures have weakened in recent months, after hints of strength earlier in the year. Many market participants have watched these series closely, attempting to divine their implications for inflation. Many interpreted the earlier firmness as suggesting an imminent uptick in inflation and, likewise, the recent weakness as suggesting subdued price inflation in the future. However, this discussion suggests that one should not necessarily draw such conclusions. For example, rising wage measures might simply increase labor’s share of the fruits of production and squeeze profits without much effect on price inflation.FRBSF Economic Letter
Are Wages Useful in Forecasting Price Inflation?
Rhys Bidder
ht Mark Thoma at Economist's View
