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Wage Inflation

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I keep hearing from articles that when wage inflation starts that’s the signal that the Fed has to raise interest rates. Why is wage inflation the marker for raising rates? Wage inflation seems to always be as a bad thing and I understand the simple earnings idea that pay employee’s more earnings go down, but is wage inflation actually bad?

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Posted by smith1111
Posted on 08/04/2017 10:57 AM
94 views
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This video addresses your question in an entertaining way: https://youtu.be/xnYZwxzxd9Y

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Posted by Lucas
Answered on 08/04/2017 6:28 PM
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    Two things:

    1) People often confuse the idea that higher wages = lower profits. This is not true. If wages go up and people save the same amount then profits actually go UP. If people earn more and save more then profits go DOWN.

    2) The belief on following wage growth is that once wages go up it means the labor market has gotten really tight. So, if workers can negotiate higher wages then the labor market is near full employment and the economy is overheating.

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    Cullen Roche Posted by Cullen Roche
    Answered on 08/04/2017 6:36 PM
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      @Lucas That was pretty amusing!

      @smith111 Wage inflation isn’t the marker for raising rates. The reason changes over time or you could say the Fed jumps from reason to reason, never having a quantitative strategy. All that matters is pushing narrative propaganda that people can anchor onto. The Fed Board is just winging it.

      As Cullen implied, there’s no tradeoff between higher wages and inflation, yet if that’s the kind of discredited “tool” the Fed relies upon to “conduct” monetary policy, no wonder it’s always fighting the last war and being a day late and a dollar short. The Fed never should have had the power to be political.

      An inflationary wage spiral is what we got to worry about, not higher wages. I can’t see how that will happen unless higher minimum/living wage laws take off rapidly and widely. More money chasing a fixed supply of goods == inflation.

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      Posted by MachineGhost
      Answered on 08/07/2017 3:43 PM
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        I think there’s actually a very good risk with the Fed being stuck in an unreality bubble that they will invert the yield curve by their dogged insistence in having “room to cut rates” for the next recession, as if the heroin junkie hadn’t achieved maximum tolerance at the zero lower bound. Last time we had something like that occur was in 1994, but that was also at the beginning of an economic expansion not late in one, even as tepid as ours. The critical question here is how fast will the Fed react when it realizes it made yet another mistake? Reversing course is critical to keeping the economy afloat.

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        Posted by MachineGhost
        Answered on 08/07/2017 3:51 PM
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