Nov

28

There was a nice overview of Bernanke’s current thinking on the economy in today’s speech. There were No bombshells, with both the rhetoric and the conclusions between the 40 yard lines of recent Fedspeak and Centralbankese.

One passage struck me as being modestly noteworthy:

What implications does the pickup in labor costs have for price inflation? One possible outcome is that increases in labor costs will largely be absorbed by a narrowing of firms’ profit margins and not be passed on to consumers in the form of higher prices. The fact that the average markup of prices over unit labor costs is currently high by historical standards suggests some scope for this outcome to occur. If higher labor costs are mostly absorbed by firms and not passed on, then workers will see the gains in their nominal compensation per hour of work translated into greater real compensation per hour; in the process, workers would capture a greater share of the fruits of the high rate of productivity growth seen in recent years. The more worrisome possibility is that tight product markets might allow firms to pass all or part of their higher labor costs through to prices, adding to inflation pressures. The data on costs, margins, and prices in coming months may shed some light on which of these two scenarios is likely to be the better description of events.

Bernanke echoes his predecessor in calling attention to the rise in profit margins, and implying it is business’ slicing of the wage/profit pie that is central to inflation pressures. This plays perfectly in the rhetorical framework of the labor union-backed Democrats who will be holding the gavels on Capitol Hill.


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