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The U.S. Inflation Process: Does Nominal Wage Inflation Cause Price Inflation, Vice-versa, or Neither?

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  • Thomas I. Palley

    (AFL-CIO, 815 Sixteenth Street NW, Washington DC 20006)

Abstract

Low unemployment has revived concerns about accelerated inflation. This paper examines the relationship between price and nominal wage inflation. It finds that it varies by business cycle. Prior to the great oil shock of 1973, price and nominal wage inflation were unconnected in a Granger-causal sense. In the 1970s, wage inflation caused price inflation. In the 1980s, the relationship reversed and price inflation caused nominal wage inflation. In the 1990s, the pattern has changed again, and there is some weak evidence of bidirectional causality between wages and PPI inflation. However, wages continue to have no impact on CPI inflation, which is widely viewed as one of the Fed's target variables. This suggests that wage inflation should be de-emphasized as a monetary policy information variable.

Suggested Citation

  • Thomas I. Palley, 1999. "The U.S. Inflation Process: Does Nominal Wage Inflation Cause Price Inflation, Vice-versa, or Neither?," Review of Radical Political Economics, Union for Radical Political Economics, vol. 31(3), pages 12-19, September.
    • Handle: RePEc:sae:reorpe:v:31:y:1999:i:3:p:12-19
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    Cited by:

    1. Hoxha Adriatik, 2010. "Causal relationship between prices and wages: VECM analysis for Germany," EuroEconomica, Danubius University of Galati, issue 26, pages 90-106, November.

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