Friday, March 14, 2014
Fear Of Wage Growth
Rapid growth in wages can trigger inflation. Higher wages stimulate demand which might grow faster than supply. The result is demand push price inflation. Paul Krugman is concerned that central bankers may be oversensitive to any sign that wages are increasing. They tend to worry more about preventing inflation than they are about the high rate of unemployment. One consequence of the over concern about wage inflation is that policies designed to fight predicted price inflation could produce an even less desirable outcome. We could end up with price deflation which Japan has battled against for many years. It is much more difficult for central bankers to reverse a price deflation spiral than it is to reduce price inflation.