Tuesday, 12 April 2011

Relative prices v. inflation

At Offsetting Behaviour Eric Crampton writes,
RBNZ rightly looks through the one-off hike in price levels that came with the GST increase. That's not inflation. But that level shift working its way into wage settlements would be.

From the latest survey of employers:

* Roughly a third say that the GST increase has been or is expected to be a factor in future wage negotiations (see Table 68)
* A majority of large (50+ employee) firms say wages and salaries either take account of past inflation outcomes, take account of expected future inflation, or are contractually linked to inflation (Table 67). Note that headline inflation numbers will include the GST hike.
I don't get it. Why would the RBNZ worry about a change in wages. Such a change is a change in a relative price, not a change in the price level. Or does the RBNZ believe in cost-push inflation. Oh dear!


Eric Crampton said...

If it feeds into longer term inflation expectations, it's something RBNZ ought worry about.

Bigger point: I'm going to win my bet with Matt, which only resolves based on price levels.

Paul Walker said...

And why should it feed into expectations? If people believe the RBNZ will do its job and fight inflation then the effect of a wage increase will be on unemployment not inflation.

Eric Crampton said...

Ah. You believe that unemployment isn't in the RBNZ's loss function then.

Paul Walker said...

The one thing, and the only thing, that the RBNZ can do, if it can do anything, is fight inflation. It can do little about unemployment.

Eric Crampton said...

Check what iPredict's saying about staying within band even after the GST blip is through.

Paul Walker said...

So iPredict tells us that people don't believe the RB will in fact do its job. So the problem is not about wage settlements feeding into expectations but the actions of the RB feeding into expectations.

Eric Crampton said...

Revised M3 is up around 4-5% annual growth lately.

Actually, I'm pretty surprised that RBNZ's allowing the dollar run-up; had thought they'd sterilize any portion coming from earthquake capital inflows. Suggests they're worried about inflation.

Matt Nolan said...

Wage settlement is important for two reasons:

1) Staggered wage-price setting, which can lead to inflation due to co-ordination issues and asymmetric information.

2) Wage growth acts as a proxy for inflation expectations (which are poorly measured) and so information on how agents respond in terms of wage growth provides an indication of inflation expectations.

Wage-price spirals are completely consistent with excessive inflation - the mechanism they work through is expectations though.

"Bigger point: I'm going to win my bet with Matt, which only resolves based on price levels."

I don't really trust the survey data too much. I will come out with a post next week - I would this week but things are a little hectic ;)