BRIAN KANTOR: What comes first: price changes or changes in wages?
Central bankers prefer to avoid surprises and offer a highly predictable and low rate of inflation
The bond market indicates that inflation is expected to stay below 2% per annum over the next 10 years in the US. And the Federal Reserve is confidently expected not to raise short-term rates this year. Are such views consistent with a very buoyant labour market? Unemployment rates are below 4%, while average earnings are rising at about 3% per annum. Some believe this portends more inflation and higher interest rates, which would confound the market consensus. Do changes in prices lead or follow changes in wage rates in the US? The economic reality is that they both follow and lead with variable lags. The markets for goods and the markets for labour have the general state of the economy in common. The wages and prices that emerge depend on how rapidly the demand for and supply of all goods, services and labour are growing. Higher or lower prices, wages and asset valuations have their causes and in turn will have effects on the willingness to buy or sell. And might not higher real w...
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