> It isn’t clear that increasing interest rates will have any impact on lowering prices. The nascent resurgence in inflation being experienced across the world is primarily still due to supply chain disruptions. The mechanism by which rising interest rates are supposed to impact inflation is essentially by increasing unemployment, which weakens workers’ bargaining power and thus slows wage growth. But lowering wage growth won’t do anything to address supply side constraints or energy shortages, which are a driver of ‘cost-push’ rather than ‘demand-pull’ inflation.
> ...
> The trade-off for policy makers between creating jobs and wage growth, while simultaneously controlling inflation, goes back to a 1958 paper by economist William Phillips on the relationship between ‘Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957’, which became a cornerstone of macroeconomics. The paper identified the correlation between lower unemployment with higher inflation and vice-versa (see Figure 2).
The explanation for this relationship was that as unemployment decreased the ability of workers to bid for higher wages increased due to less competition in the labour market. Higher wages mean more income to spend on goods and services, which leads to prices going up. This is bad for net creditors and net savers, because the inflation cancels out the interest on savings. By contrast, workers and net borrowers benefit from rising wages and prices, as it allows them to pay off their debt more quickly, which is depreciating in real terms relative to their income.
Inflation is multifactorial, different types of disruption to the economic web cause different effects on it, the article then goes on to mention the overall lower wages on US and UK post Reagan Thatcher as case study for how labor and wage growth changes inflation rates
Salary growth leads inflation in virtually all cases, and in this one too.
(Realized I can still edit: reply after reply is trying to interpret this as a statement about causality, which it emphatically is not. I'm just saying that ordering is complicated in feedback systems, and that the needed salary growth to compensate for existing inflation largely already happened. This is doubly or triply true for the tech salaries people here are making.)
The particular current case of inflation really took off with Russia's invasion of Ukraine. Talking about salary growth as a cause is way off the mark.
Salaries are only redistribution of current money supply. Inflation means an increased money supply and only banks can increase it, wether it's government banks, private banks, or both.
Probably because my mother was an economist, I've pretty much ignored the subject my entire life. However, your post piqued my curiosity. Some reading later, and I'm scratching my head: are economists really that dumb? The price of some goods must go down if the price of other goods goes up? Only in some simulation of an economy that doesn't include real humans, right?
No, the are really smart. You have to be very intelligent to be able to contrive a way to support an idea that is completely wrong. Intelligent people almost always support the most idiotic political, economical or cultural ideas, because that is a mental challenge that is satisfying. Using the sheer force of their intellect to "beat" normally gifted people in arguments about these issues, they delude themselves to believe they are right, even though they picked an absurd angle just for the challenge.
It's a feedback cycle, arguments about which node in the graph is the "real" one are pointless. My point was just empirical: almost always, the proximate cause of "inflation" is increased consumer spending, and the proximate cause of that is usually salary growth. And it was this time too.
So an argument of the form "salaries don't keep up with inflation" is backwards (usually). They already did!
It's not a feedback cycle. Inflation is the increase in money existing. Paying higher salaries do not increase the amount of money existing, as that money is taken from somewhere. Raising prices do not increase the amount of money existing. Only the money creators can increase the amount of money existing. Money is created by banks and governments in symbiosis.
Increased prices of labour or products is always a consequence of inflation and never the cause of inflation.
This is conflating "money", which you seem to take colloquially to be a finite quantity of "stuff", with "money supply". Inflation is the result of an increase in the latter, but emphatically not the former. In fact money supply grows and shrinks for all sorts of reasons that have nothing to do with things being created or destroyed.
And to my point upthread: the factors that result in changes in the money supply are themselves subject to influence by lots of things, including stuff like the rate of inflation. It is absolutely, 100%, a feedback network.
It is not so simple as to say salaries went up so inflation went up. Inflation from decreased supply at the same time as increased Treasury spending through stimuluses, coupled with the workforce shrinking, is what caused salaries to rise.
Once more, I'm not making an argument about causality. I'm saying that the "compensation" of salaries for inflation already happened.
Arguments about "why" just aren't helpful here. Everyone thinks they're smarter than everyone else and knows policies that will be perfect, and everyone is wrong for the same reasons. It's a cyclic feedback market and it just does this stuff, for the most part.
But you absolutely can't look at things with a microscope and say "salaries don't keep up with inflation", because that's (almost by definition) never true.
