Here's how inflation works

Feb 14, 2018

Given that fears of higher interest rates driven by inflation have been one key factor in the turbulent markets this month, much attention is being paid to the release of the consumer price index just now. It's up by 0.5 percent, more than expected. The core rate, excluding volatile food and energy prices, is up 0.3 percent, the most in a year.  

Core prices are up 1.8 percent in the last 12 months, close to the Federal Reserve's inflation target, which could trigger even more interest rate hikes to keep the economy from overheating. 

Here’s how inflation typically gets going: unemployment goes down, competition for workers pushes wages up and prices follow, said Diane Lim of the Conference Board.

“Often what causes inflation to rise is upward pressure on wages, which raises prices for producers, and which has to be passed on both to producers and consumers,” she said.

That’s why reports last week of rising wages helped send markets into a frenzy. But that wage growth was uneven. “Three-quarters of workers saw absolutely nothing,” said David Blanchflower, a labor economist at Dartmouth College.

Blanchflower said wage gains happened mostly at the top — for supervisors, managers and executives, which skewed the average.

“I think the markets wrongly responded to a very volatile series that certainly hasn't impacted the majority of people in the country,” he said. 

So while today’s numbers give us a data point, Blanchflower said inflation won’t really begin to climb until lots more people get a raise.

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