Economists Think Inflation Will Rise Sharply In 2018: They're Wrong

Let’s investigate six reasons economists think inflation is about to pick in 2018 and why I think they are dreaming.

Reason Number One – Wage Hikes

Minimum wages rise in 18 states starting in 2018.

Former Fed Vice-Chairman Stanley Fischer told Bloomberg TV on October 4, “I still believe we will have higher inflation. The basic mechanism here is unemployment is declining all the time, wages will start going up at some stage.”

Wage Hike Rebuttal

The National Bureau of Economic Research paper: Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle, 2017 concludes there was a negative benefit to low wage workers as a result of wage hike.

The NBER Two-Page Synopsis finds:

A 9% reduction in hours worked at wages below $19/hour.

A reduction of over $100 million per year in total payroll for low-wage jobs, measured as total sum of increased wages received less wages lost due to employment reductions. Total payroll losses average about $125 per job per month.

The findings that total payroll for low-wage jobs declined rather than rose as a consequence of the 2016 minimum wage increase is at odds with most prior studies of minimum wage laws. These differences likely reflect methodological improvements made possible by Washington State’s exceptional individual-level data. When we replicate methods used in previous studies, we produce the same results as previously found.

This is an issue that’s debated over and over again, mostly with poor methodologies to come to the desired conclusion.

In contrast, the NBER had “exceptional individual-level data”.

Adding support the NBER’s conclusion, the Bank of Canada estimates Minimum Wage Hikes Could Cost Canada’s Economy 60,000 jobs by 2019.

By the way, and as discussed in Staggering Rent Increases in 2017 the median U.S. rental now requires 29% of median monthly income, according to Zillow. Between 1985 and 2000, renters spent about 25.8% of their income on housing.

Next factor in student debt.

Finally, note the staggering fact that 24% of millennials are still paying down Christmas purchases from 2016.

For details, please see Holiday Shopping: Sticking to a Budget? Even Have One?

The proper conclusion is wage hikes are not sufficient to pay down debts let alone to be used chasing the prices of goods and services higher.

Reason Number Two – Declining Unemployment

This is the Phillips Curve thesis.

The theory claims there is a historical inverse relationship between rates of unemployment and corresponding rates of inflation.

In short, falling unemployment will lead to a rise in inflation.

In March of 2017, Janet Yellen commented in a post-FOMC Q&A “The Phillips Curve is Alive“.

Also note that Stanley Fischer also mentioned falling unemployment as a determinant for rising inflation.