Won’t the cost of goods and services go up if low unemployment causes wage increases? It’s a question we hear a lot. Vice President Steve Johnson discussed the relationship between wages and inflation and what that can tell us about today’s economy in our recent quarterly webinar*: Tariffs, Trade and Trump. Please enjoy the excerpt below and click herefor the full webinar replay to hear more.
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Steve Johnson: Every Monday afternoon between 1:00 and 2:00 at our weekly research meeting, we may discuss the “Phillips Curve” as part of this whole economic picture. The Phillips Curve is credited to William Phillips, the New Zealand-born economic who in the late 1950s posited that with this economic theory, the lower an economy’s unemployment rate, the more rapidly wages should increase, which eventually leads to inflation.
Now, like a lot of things since 2008 and 2009, that hasn’t been the case, just like all those people who believe that the Fed cutting interest rates and believing in quantitative easing would lead to massive runaway inflation, there are a lot of folks who believe that really since the recovery began with an unemployment rate at 3.7% that we would start to see wages increase and that inflation would be passed through. That hasn’t been the case.
In fact, I think this is one of the more confounding aspects of the recovery. It’s also really posing a challenge to the Fed and to Central Banks around the world because there is a real issue there. I think it’s one of the reasons that our Federal Reserve, as well as the European Central Bank and the Bank of Japan, have been so accommodative with their policy—because we haven’t seen that inflation.
*Webinar recorded after the market closed on July 24, 2019.
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