Inflation reality check: Don’t blame wages and salaries for higher prices

Yes, the economy can be complicated, and economic reporters work under tight deadlines. This is no excuse for the media meme that blames rising wages for today’s inflation. The Wall Street Journal A recent headline summed up this misperception, “Fast Wage Growth Puts Pressure on Inflation.” The journal’s self-serving claims are refuted by the facts and rejected by the International Monetary Fund. And with corporate profits growing so much faster than wages and salaries, it’s morally damaging to imply that ordinary people are greedy and disrupting the post-pandemic economic recovery.

I’ve always thought that when people’s wages and salaries rise faster than inflation it’s a good thing because it means most people are getting ahead. This is ideal too. No one complained, of course not Journal, while average hourly wages and salaries rose 9 percent and inflation rose 5.1 percent during Donald Trump’s first three years in office. (I use the Fed’s preferred measure of inflation, the change in prices for private consumption.) Then comes the pandemic, and while unemployment rises and rises and rises, people’s average hourly wages and salaries still rise 5.5 percent while prices rise only 1.3 percent.

Yes, inflation jumps to 6 percent in 2021, thanks to supply chain disruptions, electricity prices rising more than 50 percent, and faster real growth in average hourly wages and salaries of 4.9 percent. These wage and salary gains lagged behind price increases because when inflation spiked, businesses could raise their prices faster than workers could negotiate a price increase. But inflation did not cause wages and salaries to rise. In fact, they were in line with growth in 2020.

In 2022, the trend continued as average wage and salary growth increased to 4.6 percent and inflation dropped to 5 percent. Those eager to blame 5 percent price increases on average workers sometimes point to the 1970s, when union contracts with automatic inflation escalators and higher price expectations by businesses and the public compounded the damage caused by OPEC’s consistent price increases.

But the 2020s are not the 1970s. The deal to raise inflation is long gone, and financial markets and the public expect our current rate of inflation to come down quickly. For example, the Federal Reserve Bank of New York reports that from September 2021 to last December, public expectations for three-year inflation fell from 4.2 percent to 3.0 percent, and expectations for five years were 2.4 percent. Far from fearing that wage gains are driving up inflation, the public and markets reasonably expect that inflation is moving toward the Fed’s own 2 percent inflation target.

It is corporate profits, not wage and salary gains, that outpace inflation and likely contribute to it. Inflation measures the increase in the prices companies charge and their profits represent what is left over after paying their workers, suppliers, vendors and taxes. During the pandemic, from the first quarter of 2020 to the third quarter of 2022, after-tax corporate profits rose 49.1 percent. That’s nearly three times the 16.8 percent increase in all workers’ income from wages, salaries and benefits.

So, the next time someone tells you that wages and salaries are driving inflation, ask them how much their stock portfolio and dividends have grown.