Noah Millman (who you should definitely be reading):
since the COVID-related supply-chain problems resolved, services inflation has stubbornly outpaced inflation in goods (which has been flat to negative lately). Wages are a bigger component of the cost of services than for goods (in general), and productivity growth has been tougher to achieve in the services sector than in manufacturing. All of that suggests to me that what the Fed is really waiting for is evidence of significant moderation in wage growth. As a political matter, that goal is surely a problem for the incumbent president—but it’s potentially an economic problem as well if we’re actually trying to run a full-employment economy. Can you do that for any length of time without wage growth starting to feed into services inflation in a significant way? I wonder.
Lurking in there, perhaps, is a threat to the long-term viability of business as usual in the global economy. In capitalism, we want to pay low prices because we want to be able to buy and do more stuff. We want to earn higher wages because if earn higher wages we can buy and do more stuff. But as Noah’s note here points out, these are obviously interrelated phenomena, ones in significant tension with each other. You’ll agree that the Fed isn’t going to come out and say “we want people to stop earning more money,” much less the Biden administration. Noah is probably correct to surmise, though, that the Fed internally sees wage growth as a problem, given how much wage growth fuels price increases. But getting an economy where more people make more money is pretty close to the primary goal of modern economic politics! And given that recent wage growth has finally redounded to the benefit of people at the bottom of the wage scale, the optics of trying to stop this growth for the sake of reducing price pressure get even worse. Biden’s not going to give a speech where he says, “My fellow Democrats, we must unite behind our efforts to keep wages for poor people from increasing!,” I’m willing to bet. And yet constant worrying about prices must eventually entail a desire to put downward pressure on wage growth.