US Inflation Remains Stubborn As Wage-Price Spiral Persists

The United States continues to grapple with persistent inflation, a phenomenon that has puzzled policymakers and researchers alike. This issue, however, is not new and has been well-documented since the days of renowned economist John Maynard Keynes in the 1930s. Recent regression analyses using U.S. core CPI inflation data (excluding food and energy) have revealed that various autoregressive (AR) models show statistically significant lags, suggesting that inflation persistence could last for nearly a year.

While prices can be adjusted relatively quickly, wages are more rigid due to standard labor contracts that typically only allow for yearly increases and rarely permit reductions. This wage stickiness is crucial in explaining price stickiness, as most modern models suggest.

The wage-price spiral hypothesis is essential for linking wage and price stickiness, and if established, it can explain inflation persistence through unemployment stickiness, which aligns with the Phillips curve framework. An analysis of U.S. hourly earnings growth and CPI growth for services reveals that the two have been co-moving at similar levels since the mid-1990s, with clear uptrends since 2010, indicating long-standing inflationary pressure.

As the high base period has passed, observed inflation in the coming months is expected to be higher than recent levels. With earnings inflation easing to around 4%, services inflation and the overall inflation level are likely to remain at a similar level of 4% for the foreseeable future.