Lee Metcalf: “I am going to speak on does wage inflation cause price inflation? That is a question that few have asked, even at the…”

“I am going to speak on does wage inflation cause price inflation? That is a question that few have asked, even at the Federal Reserve Systems' Board of Governors. Though wage inflation is presently utilized to aid in determining whether the Fed raises the interest rates or lowers rates or leaves rates the way they are, most have never heard of wage inflation until I spoke to this issue in a previous speech. Most still think it means that the wages of workers in the broadest sense are trending upward. Most think it just means workers are getting paid a little more, proof then of our booming economy. Let me quote one recent headline from the Wall Street Journal: ``Unions Seek Big Pay Gains, Sparking Inflation Worries.'' In 1994, Layard and Nickell in their book ``The Unemployment Crisis'' stated this: When buoyant demand reduces unemployment (at least relative to recent experience levels) inflationary pressure develops. Firms start bidding against each other for labor, and workers feel more confident in pressing wage claims. If the inflationary pressure is too great, inflation starts spiralling upwards: higher wages lead to higher price rises, leading to still higher wage rises, and so on. This is the wage price spiral.”