Wages are among our most scrutinized economic indicators. It's no secret why. We'd all like a pay raise. But there's a second, less-recognized reason. Wages are considered a precursor to higher inflation. If they rise sharply, prices will follow. That's the theory.
It's wrong — or at least dangerously incomplete.
This matters now. The Federal Reserve is considering when — and how much — to raise short-term interest rates, which have been held near zero since late 2008. Any acceleration of wage gains could be taken as evidence of greater inflationary pressures and justification for quicker and steeper increases in interest rates. The risk is that this conventional interpretation is mistaken.