Christopher Waller on Wages, Productivity, and Inflation

A few lines from his most recent speech and subsequent Q&A that caught my attention.

Christopher Waller—the influential Federal Reserve governor who rightly argued in 2022 that the number of job openings could fall sharply without a drop in the number of jobs—implied on Monday that nominal wage growth may need to slow further for U.S. inflation to stabilize at the Fed’s 2% yearly goal. I had the chance to hear his most recent speech as well as the subsequent Q&A during a fascinating conference hosted by the Hoover Institution and the Shadow Open Market Committee (SOMC).¹ Crucially, he seemed less optimistic in his extemporaneous statements than in his prepared remarks.

The Link Between Wage Growth and Inflation

Changes in wages do not automatically flow through one-for-one to changes in prices. While extra income tends to get spent on goods and services, sometimes it is used to pay down debts or purchase financial assets. And even if the dollar value of spending on goods and services rises, the impact on aggregate prices depends on the extent to which businesses can produce more of what consumers want to buy. Besides which, many consumer goods and inputs to production are traded globally, which means that changes in foreign demand can also affect domestic inflation outcomes, for good or ill.

That said, the typical American worker’s cash pay has been rising about 1-1.5 percentage points (annualized) faster than in the years immediately before the pandemic. That is consistent with the slightly faster underlying inflationary trend over the roughly two years since the end of the temporary disruptions attributable to the pandemic and Russia’s invasion of Ukraine.

This is what Waller said about the issue in his prepared remarks: