Inflation, Employment costs and Profits: the US evidence
Many commentators worry that high wage growth will prevent inflation from returning to central banks’ 2% targets soon. But two economic forces drive a wedge between wage growth and inflation. The first of these is productivity. Since productivity is generally rising over time, wage growth will exceed inflation on average. The second is firms’ profit margins. These tend to rise when inflation picks up, as output prices then often rise faster than firms’ costs. Wage growth can be seen as one way in which the economy returns profit margins to their earlier level. In this Macro Flash Note, EFG chief economist Stefan Gerlach looks at the US data.
Stefan Gerlach
6 min read