Back in the 1970s, when inflation actually was a serious global economic problem, economists tried to distinguish between two types of inflation:
—demand-pull is what we typically think of as inflation today. It’s the situation where an economy is at full industrial capacity and full employment but is still growing strongly. The only way to find new workers to staff business expansion is to lure employees away from rivals. How to do this is? …offer them more money. An intercompany bidding war for talent ensues. Salaries rise.
Newly flush workers want to spend on goods and services. But these are also in limited supply because industry is capacity constrained. How to get the stuff we want? …bid higher prices.
Voilà! …rip-roaring inflation.
This problem can be laid squarely at the feet of too-loose money policy.
—cost-push. This is the idea that the price of one or more key agricultural or mineral commodities rises by a lot (think; the two oil shocks of the 1970s, when crude doubled or tripled in price). Such a price increase is passed on to manufacturers and to consumers, causing the overall price level to rise.
This type of inflation is no longer talked about, for several reasons:
—-monetarists have successfully argued that oil shock inflation was caused more by the decision of central banks to soften the blow by rapid money supply expansion than by the price increase itself. It was, they said, accommodation that caused the inflation, not oil. After all, falling oil prices in the 1980s didn’t cause deflation.
—-wages are no longer routinely indexed for inflation for the vast majority of workers, so a key pass-through mechanism is no longer operating
—-advanced economies are much more involved in providing services that use intellectual resources, which are less subject to the physical constraints of plant, mine or farm capacity.
—-globalization has put significant upward pressure on commodities prices, but has also created downward pressure on wages in industries making tradable goods. Of course, in the internet age, a lot more stuff is in the tradable category, too.
—-advanced economies, particularly the US, have evolved to the position where labor costs are perhaps three-quarters of the total economy, and therefore effectively the only thing that matters.
cost-push making a comeback?
I think so.
Japan recently depreciated the yen by 20%. This has caused a surge in profits for export-oriented manufacturing, and a tsunami of Asian tourists seeking to buy, among other things, heated Toto toilet seats. Prices have shifted from falling to rising.
But wages haven’t gone up at all. So, yes, the depreciation has created inflation, but most individuals are worse off than they were before–because they’re paying 20% more for imported items like fuel and food. (This isn’t quite correct. There’s a substitution effect along with the income effect, meaning that people shift what they consume in order to lessen the harm to their well-being from higher prices. They, say, eat tofu instead of beef or get clothes from a consignment store instead of Uniqlo.)
There’s also the effect of price rises on the long-term unemployed in the US or the EU. It’s not quite the same thing, but it’s certainly different from the demand-pull world, where everyone is better off–but tricked by the fact nominal (but not necessarily real) wages are rising into thinking they’re better off than they are.
I’m not sure, other than to take a trip to Japan before the place falls apart.
But I do think that the failure of wages to rise, either in Japan or the US, despite highly stimulative monetary policy is a potentially explosive social/political issue. It may reach a tipping point where big social changes are demanded.