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Reading: Inflation May Have Peaked. The Fed Needs to Step Gingerly.
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Michigan Post > Blog > Business > Inflation May Have Peaked. The Fed Needs to Step Gingerly.
Business

Inflation May Have Peaked. The Fed Needs to Step Gingerly.

By Editorial Board Published February 11, 2022 2 Min Read
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Inflation May Have Peaked. The Fed Needs to Step Gingerly.
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In short, it might be helpful to reframe the C.P.I. news.

Newspapers could quite accurately have run this much duller headline: Inflation Remained Stable, Well Below Its October Peak.

Not a wage-price spiral.

When inflation becomes deeply worrisome, it is typically because a “wage-price spiral” has set in, with workers responding to price increases with demands for even greater wage increases, and so on.

But that hasn’t happened so far.

Yes, after years of rising corporate profits and meager raises, many workers have greater leverage these days, and are demanding more pay. Why shouldn’t they?

Labor shortages induced by the pandemic appear to have accelerated corporate investment in capital equipment like computers and software that are increasing productivity, Ian Shepherdson, chief economist of Pantheon Macroeconomics, a research firm, said Wednesday in an online talk.

That could produce a happy confluence of events: rising wages, offset by rising productivity, while inflation ebbs, thanks to the Fed and to the easing of pandemic effects.

Let’s hope so.

The alternative, a true wage-price spiral fueling runaway inflation, is something the United States hasn’t seen since Paul A. Volcker was Fed chairman from 1979 until 1987. It took brutally high interest rates, soaring unemployment and two recessions to wring high inflation out of the national psyche.

In a new paper, Ray Fair, the Yale economist, used his longstanding econometric model to test the effects of Fed rate increases. In a telephone interview, he said his conclusion was this: “If the Fed had to take down, say, 5 percentage points of inflation and try do it all in one year, it would be far more disruptive than most people understand.”

TAGGED:Consumer Price IndexCoronavirus (2019-nCoV)Federal Reserve SystemInflation (Economics)Interest RatesPrices (Fares, Fees and Rates)The Washington MailUnited States EconomyWages and Salaries
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