September 18, 2022

INFLATION IS ALWAYS A FUNCTION OF WAGES:

Good News is Bad News: Understanding Today's Topsy-Turvy Economy and the Fed's Reaction Function (Joseph Politano, 9/17/22, Apricitas Economics)

The biggest source of "good news that's bad news" comes from the labor market. The Federal Reserve wants to get inflation down, and in doing so wants to see aggregate income growth moderate towards the 5% per-year level from before the pandemic. So the fact that aggregate wage growth still remains elevated by pre-pandemic standards is not welcome news to them--higher income growth means higher spending growth, and higher spending growth means higher inflation. [...]

What kind of bad news could become good news based on the Fed's reaction to it? In theory, one example came hidden in last month's jobs report. Even though job growth was relatively strong, the unemployment rate rose from 3.5% to 3.7%. That wasn't from a reduction in workers with jobs but rather from an increase in the number of people without jobs who were actively looking for work.

To be clear, one report is not enough to draw a trend from (especially when unemployment data can be so volatile). But a situation in which wage growth mediates through labor supply improvements rather than labor demand destruction is the Federal Reserve's best-case scenario for the job market. So rising unemployment can also be bad news that's actually good news.

Open the borders and have FL and TX distribute the new employees.

Posted by at September 18, 2022 12:00 AM

  

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