Inflation reality check: Don’t blame wages and salaries for high prices

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Yes, the economy can be complicated and business journalists work to tight deadlines. That’s no excuse for the media meme that blames rising wages for much of today’s inflation. The Wall Street Journal summed up this misconception in a recent headline, Rapid Wage Growth Keeps Pressure on Inflation. Journals’ self-serving view is refuted by the data and dismissed by the International Monetary Fund. And with corporate profits rising much faster than wages and salaries, it is morally harmful to suggest that ordinary people are greedy and disrupting post-pandemic economic recovery.

I always thought it was a good thing when people’s wages and salaries grew faster than inflation, because that meant most people were moving up. This is also the norm. No one complained, certainly not the Journal, when average hourly wages and salaries rose 9% and inflation rose 5.1%, during Donald Trump’s first three years in office. (I use the Fed’s preferred measure for inflation, price changes for personal consumption expenditure.) Then came the pandemic, and as unemployment rose and fell as growth waned and skyrocketed, people’s average hourly wages and salaries rose another 5.5% while prices rose. only 1.3 percent.

Yes, inflation jumped to 6% in 2021, thanks to supply chain disruptions, energy prices that soared more than 50%, and rapid real growth that pushed up wages and average hourly salaries of 4.9%. These wage and salary gains have been less than price increases because when inflation suddenly heats up, companies can raise prices faster than workers can negotiate increases. But those wage and salary gains that followed inflation didn’t cause it. In fact, they were in line with the 2020 increases.

In 2022, the trend continued, with average growth in wages and salaries increasing by 4.6% while inflation fell to 5%. Those willing to blame the 5% price hike on average workers sometimes cite the 1970s, when union contracts with automatic inflation escalators and higher price expectations by businesses and the public exacerbated the damage. caused by OPEC’s serial price hikes.

But the 2020s are not the 1970s. Inflation escalation contracts are long gone, and financial markets and the public expect our current inflation to fall rapidly. The Federal Reserve Bank of New York, for example, reports that from September 2021 to last December, people’s three-year inflation expectations fell from 4.2% to 3.0%, and expectations on five years is 2.4%. Far from fearing that wage gains will fuel inflation, the public and markets reasonably expect price increases to head towards the Fed’s 2% inflation target.

Its outsized profits, not wage gains, which have outpaced inflation and may have contributed to it. Inflation measures the increase in prices charged by companies, and their profits represent what is left over after paying their workers, suppliers, vendors and taxes. During the pandemic, from the first quarter of 2020 to the third quarter of 2022, after-tax corporate profits jumped 49.1%. That’s nearly three times the 16.8% increase in all workers’ earnings from wages, salaries and benefits.

So the next time someone tells you that wages and salaries cause inflation, ask them how much their stock portfolio and dividends have grown.

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