Wage inflation is occurring just as the Fed predicted and desired

Neel Kashkari, Minneapolis Fed President, stated in a speech on 9 January at Cargill University that the Fed was targeting lower unemployment to raise wages, thereby pumping up inflation to the 2% target the Fed has been expecting. His opinion reflects the concern by the Federal Reserve, that a lack of inflation implies deflation. On Friday, 2 February, he was quoted by CNBC as saying the January 2018 employment report was a sign of “wage growth.” Everyone who is currently invested in the stock market knows what happened next – a dramatic drop in the Dow.

James Bullard, Saint Louis Fed President, said just about the opposite of Kashkari in a speech at the University of Kentucky. He stated that he believes a strong labor market does not necessarily auger higher inflation. He stated that the inverse relationship between unemployment and inflation, known as the Phillips Curve (named after the New Zealand economist who first identified it), is no longer in effect. His “President’s Message” regarding this subject on the StLouisFed website states: “… the statistical relationship between unemployment and inflation is much flatter today than it has been historically.”

With these two different perspectives, what should one believe? If there is a third perspective considered, it should be your own. What do you think will happen, given the statements made above? What I can say from a personal perspective, is that my company is seeing labor competition, due to the tight labor market. This is causing wage inflation, and this year the annual “merit” increases are the highest they have been in the past decade. What should that mean for inflation? Typically, as wages go higher, consumers purchase more products and this will eventually result in higher inflation.

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