Wage-Price Spiral Fuels Persistent Inflation In The US

The United States continues to face the challenge of persistent inflation, a problem that has long been documented and studied by economists since the era of John Maynard Keynes in the 1930s. Recent regression analyses using U.S. core CPI inflation data (excluding food and energy) have shown that various autoregressive (AR) models result in statistically significant lags, indicating that inflation persistence could last for nearly a year.

The key factor in explaining inflation stickiness appears to be wage stickiness, as prices can be adjusted relatively quickly, but wages are more rigid due to standard labor contracts that typically only allow for yearly increases and rarely permit reductions.

The wage-price spiral hypothesis is crucial in linking wage and price stickiness, and if established, it can explain inflation persistence through unemployment stickiness, which is consistent with the Phillips curve framework. An analysis of U.S. hourly earnings growth and CPI growth for services reveals that the two have been co-moving at similar levels since the mid-1990s, with clear uptrends since 2010, suggesting long-standing inflationary pressure.

As the high base period has passed, observed inflation in the coming months is expected to be higher than recent levels. With earnings inflation easing to around 4%, services inflation and the overall inflation level are likely to remain at a similar level of 4% for the foreseeable future, posing ongoing challenges for policymakers and researchers.

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