A reader asks me about this passage from today's Paul Krugman column:
We’re already closer to outright deflation than at any point since the Great Depression. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s.
I agree with Paul that persistent deflation would be a problem (for reasons discussed in Chapter 11 of my intermediate macro textbook). But I am not convinced we are close as close to this precipice as Paul suggests. Stories of wage cuts are still anecdotal.
Let's look at the data. Here is an excerpt from today's employment report:
In January, average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls rose by 5 cents, or 0.3 percent, seasonally adjusted. This followed gains of 7 cents in December and 6 cents in November. Over the past 12 months, average hourly earnings increased by 3.9 percent.
If we assume the normal 2 percent rate of productivity growth, 3.9 percent wage inflation is consistent with about 1.9 percent price inflation. So, at this point, widespread wage and price deflation seems more of a fear than a reality.
Here is the relevant graph of wage inflation: