Why the Fed’s wage-price inflation model is outdated and unjust

The U.S. Federal Reserve assumes that employment costs and rising wages leads to inflation — what economists call the wage-price model. It’s wielded its power according to this assumption through all ages of the American economy, generally ignoring nuances of the present.

Here’s the justification: consumers spend more when they have higher incomes, and companies compensate for the increased cost of labor by raising prices. The wage-price model predicts a spiral of all-around growing prices, with higher wages at the root of the cycle (and not the other way around).

The problem: today’s wages lag prices. In fact, American wages have lagged behind prices since the 1980s. Worker pay has long been relatively stagnant compared to the growth of the economy. The wage-price model can’t explain inflation like it used to. Causes that are likely more significant today include the Ukraine invasion, stock payouts, stock pricing, and price gouging. And shocker, most of these factors depend on the top 1%.

How does increasing interest rates play into all this? Increasing interest rates slows down the housing market among several others, and companies cut jobs to prepare for the expected recession. Ultimately, we see more costly loans, less valuable bonds, and increased unemployment. All that for a downward pressure on labor.

Every time the balance of economic power shifts towards workers, the Fed tries to put labor back in its place. Since the wage-price model was (at least more) effective in the past, the Fed can use it as an easy excuse to protect the status-quo of the wealth gap. In today’s corporate democracy, that is expected.

By law, the Federal Reserve’s should support the interests of American workers. Today, the health of the “economy” represents the bloom of billionaires and corporations, not the general population. The Fed is telling us that it doesn’t care about the people, and that needs to change.

Sources:

https://time.com/6253699/federal-reserve-inflation-interest-rates-workers/