JUNE 23, 2021
Kuttner on TAP
Time for Some Good Inflation
The inflation scare has subsided. The price hikes in sectors such as raw materials that pushed up the Consumer Price Index in recent months proved transitory.

The Federal Reserve has made noises about very modest interest rate increases next year, but not enough to douse the economic recovery. That’s all good news.

But there is one kind of good inflation that we should be cheering on—inflation of low wages.

The dirty little secret of the recent era of very low inflation is that the prime source of well-behaved prices has been shabby wages. The combination of outsourced manufacturing, gig work, weakened unions, and a low-wage service sector has led wages to lag productivity growth. All the economy’s gains have gone to the top.

In the aftermath of COVID, labor shortages have begun to appear. Some “essential” workers have concluded that risking their lives for $7.25 an hour just isn’t worth it. The Amazons of the world have had to raise wages a tad in order to find workers to operate the economy’s new sweatshops—giant warehouses.

Labor shortages bid up what economists call the reservation wage—the lowest wage that will fetch willing workers. A decent de facto minimum wage should be at least $20 an hour.

Some of the increased labor cost can and should come out of profits. God knows the Amazons can afford it. Consumer resistance to higher prices can limit price inflation. The revival of antitrust enforcement and more old-fashioned price competition can also help.

Yet the inflation rate has been running below the Fed’s own target. And if higher wages produce a modest uptick in inflation, bring it on.

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