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The word “stagflation” is being whispered about as a coming danger for the U.S. economy. Those who lived through the 1970s-80s experience know current conditions are nowhere near the sorry state of that time.
Importantly, today’s inflation generator is missing a key gear: wage pressures. You just have to look at Friday’s report on employment costs.
The word stagflation, which describes a situation where the inflation rate is high and the economic growth rate is low, became popular about three decades ago when U.S. economic growth hit a brick wall and inflation surged to the stratosphere.
From 1979 to 1981, real gross domestic product grew an average of just 1.8% (including a short recession in 1980). Yearly inflation, as measured by the consumer price index, averaged a painful 11.7%. Core inflation, which excludes food and energy, also surged, averaging 10.9% across those three years.
In today’s situation, real GDP did slow in the first quarter. But the drags look mostly temporary, and growth is expected to be above 3% this year. The CPI is up 2.7% over the year ended in March. The core rate is just 1.2%–hardly stratosphere levels.
To be sure, inflation is likely to increase further this year. More companies are passing along their higher commodity costs to their customers. And shelter inflation is expected to pick up.
Today’s price increases, however, will not get out of control as they did three decades ago. The typical inflation cycle involves rising prices pushing up wages which trigger more price increases to cover higher wage costs.
The current cycle is missing its middle step: there is too much slack in the U.S. labor market. As a result, labor costs are barely moving.
The employment cost index–which measures wages, salaries and benefits–increased just 2.0% in the year ended in March. That’s little changed from the 1.9% average of 2010, and it’s down from 3.3% increase right before the recession. And because productivity growth remains solid, unit labor costs fell in 2010.
Although price increases are cutting into their buying power, workers do not have the leverage to bargain for bigger pay raises.
That was not the case three decades ago. When prices started to rise, so did wages. Yearly growth in average hourly pay jumped from 7.3% in 1977, to as high as 9.0% in mid-1981. (Indeed, the ECI was created so policymakers could get a better handle on labor cost pressures within the economy.)
A major structural reason given for the lack of bargaining power is the declining share of union membership. Union contracts typically include a cost-of-living adjustment for wages. In 1983, the first year for comparable data, 20.1% of wage and salary workers were union members. In 2010, the rate was down to 11.9%.
A big cyclical reason is the current overhang of labor. The official number of unemployed is 13.5 million. Another 8.4 million are working part-time but would prefer a full-time slot. Another near-million workers have simply given up.
When supply exceeds demand, prices–in this case, wages–have to adjust lower. Until labor markets tighten significantly, businesses have great leeway to manage their largest expense, labor costs.
That is why fears of stagflation are overblown.
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I guess we will fumble around for a name for it since there are no labor lib activists out there spinning one. The point though is that real income is falling and has been falling for some time now. Thou shalt not speak up against a Dem in the White House even when the country is in shambles and getting worse.
WSW is a classic troll shut in.
we will have inflation with declining wages.
and economists will still manage to keep their jobs to deceive the working people.
Semper is a military deserter!
WSW is the military service liar that was caught on these blogs by a Vietnam vet who ran the time frame he claimed and saw it was impossible. That vet was right and WSW of course hates this as he was so stupid to lie about something like that. Just a dishonorable slime ball fake. Lies about everything no doubt. Ooohrah. WSW the Marines are always here to catch you lying a-s.
Real Time Economics offers exclusive news, analysis and commentary on the economy, Federal Reserve policy and economics. The Wall Street Journal’s Phil Izzo and Sudeep Reddy are the lead writers, with contributions from other Journal reporters and editors. Send news items, comments and questions to realtimeeconomics@wsj.com.
Read more Economics coverage.
Digg
The word “stagflation” is being whispered about as a coming danger for the U.S. economy. Those who lived through the 1970s-80s experience know current conditions are nowhere near the sorry state of that time.
Importantly, today’s inflation generator is missing a key gear: wage pressures. You just have to look at Friday’s report on employment costs.
The word stagflation, which describes a situation where the inflation rate is high and the economic growth rate is low, became popular about three decades ago when U.S. economic growth hit a brick wall and inflation surged to the stratosphere.
From 1979 to 1981, real gross domestic product grew an average of just 1.8% (including a short recession in 1980). Yearly inflation, as measured by the consumer price index, averaged a painful 11.7%. Core inflation, which excludes food and energy, also surged, averaging 10.9% across those three years.
In today’s situation, real GDP did slow in the first quarter. But the drags look mostly temporary, and growth is expected to be above 3% this year. The CPI is up 2.7% over the year ended in March. The core rate is just 1.2%–hardly stratosphere levels.
To be sure, inflation is likely to increase further this year. More companies are passing along their higher commodity costs to their customers. And shelter inflation is expected to pick up.
Today’s price increases, however, will not get out of control as they did three decades ago. The typical inflation cycle involves rising prices pushing up wages which trigger more price increases to cover higher wage costs.
The current cycle is missing its middle step: there is too much slack in the U.S. labor market. As a result, labor costs are barely moving.
The employment cost index–which measures wages, salaries and benefits–increased just 2.0% in the year ended in March. That’s little changed from the 1.9% average of 2010, and it’s down from 3.3% increase right before the recession. And because productivity growth remains solid, unit labor costs fell in 2010.
Although price increases are cutting into their buying power, workers do not have the leverage to bargain for bigger pay raises.
That was not the case three decades ago. When prices started to rise, so did wages. Yearly growth in average hourly pay jumped from 7.3% in 1977, to as high as 9.0% in mid-1981. (Indeed, the ECI was created so policymakers could get a better handle on labor cost pressures within the economy.)
A major structural reason given for the lack of bargaining power is the declining share of union membership. Union contracts typically include a cost-of-living adjustment for wages. In 1983, the first year for comparable data, 20.1% of wage and salary workers were union members. In 2010, the rate was down to 11.9%.
A big cyclical reason is the current overhang of labor. The official number of unemployed is 13.5 million. Another 8.4 million are working part-time but would prefer a full-time slot. Another near-million workers have simply given up.
When supply exceeds demand, prices–in this case, wages–have to adjust lower. Until labor markets tighten significantly, businesses have great leeway to manage their largest expense, labor costs.
That is why fears of stagflation are overblown.
