If you hear a thunderclap don’t look for a lightning bolt, because the lightning comes before the thunder.
Austan Goolsbee, the president of the Federal Reserve Bank of Chicago, used that metaphor on Wednesday when speaking to reporters at The New York Times to explain how he reacts to news about wages and prices.
Wages are like thunder and prices are like lightning, Goolsbee said. Workers suffered from a pandemic-related burst of inflation because the prices they had to pay for stuff (lightning) rose much faster than what they earned from their jobs (thunder).
Now the situation is reversed: Wages are rising faster than prices. The Bureau of Labor Statistics reported on Tuesday that average hourly earnings rose 0.6 percent from December, while consumer prices rose just 0.3 percent. Over a 12-month period, average hourly earnings adjusted for inflation rose 1.4 percent, seasonally adjusted, the bureau said.
Some economists and businesspeople worry about a wage-price spiral, in which increases in wages cause businesses to raise prices, which in turn induces workers to demand more money, and so on.
But a wage-price spiral appears less likely when taking into account the “stickiness” of wages, Goolsbee told us. Lightning comes before thunder.
The stock and bond markets reacted badly to the inflation report on Tuesday, with investors fearing that higher-than-expected inflation would delay a decision by the Federal Reserve to begin cutting interest rates. (Lower interest rates make bonds more valuable and tend to lift stock prices as well.)
Goolsbee didn’t say when he thought the Fed should start cutting rates, but he did say that one month of unfavorable inflation news didn’t worry him too much. He also said that the interest rate the Fed controls is unusually high in inflation-adjusted terms, and “you should be careful staying this restrictive for a long time.”
To me, Goolsbee, who was chairman of the Council of Economic Advisers in the Obama administration, comes across as a dove — someone who likes low rates and cares more about unemployment than inflation. He said he rejects being labeled either a dove or a hawk. Instead, he called himself a “data dog.”
That’s what any policymaker would say. People in the markets categorize him as a dove. I think that’s a correct assessment — and I think Goolsbee is correct in his assessment that higher inflation is not a clear and present danger.
