Some respected economists are talking as if the US economy is in serious inflationary trouble. But the current uptick in price growth is highly likely to be a largely benign consequence of the post-pandemic recovery.
In the past three years, technological advances have provided about one percentage point of warranted US real wage growth each year – admittedly, only half the rate of earlier times, but still something. Yet, real wages are currently 4% below their warranted value from adding on the underlying fundamental productivity trend to the pre-pandemic real wage Employment Cost Index (ECI) level. Does that sound like a “high-pressure” labor market to you?
Those who believe that the US labor market is in some sense “tight” point out that the ECI increased by 3.7% in the year to September – well above its 3% annual growth rate in the pre-pandemic years of former US President Donald Trump’s administration. But, because US consumer prices have increased by 5.4% over the past year, the ECI-basis real wage has fallen by 1.7% in that period. In a high-pressure economy with a tight labor market, workers would have enough bargaining power to obtain real wage increases.
Nowcasting is extremely difficult, and hazardous. But the “now” that I see today is the one I forecasted two to three quarters ago. Yes, the recovering US economy, like a driver who suddenly accelerates, is leaving inflationary skid marks on the asphalt. But, as I argued in May, these should not concern us, because “burning rubber to rejoin highway traffic is not the same thing as overheating the engine.”