Shocking wages, up then down
An observation from Credit Suisse economists about wages, emphasis ours:
The 2008 negative shock on prices was so large and, more importantly, so unexpected that sticky nominal wages were unable to react timely to deflation, causing real labor costs to rise sharply.Interestingly, the severity of the shock was only partially explained by nominal wage rigidities, we think that an important factor driving the rise in real wages was the largely unanticipated nature of the deflationary episode of Q4:2008.To illustrate how surprising deflation was at the time, we turn to the inflation swap market. By October 1 2008, inflation swaps were pricing +1.4% inflation for the July 2008-July 2009 period. Actual delivered inflation for that period turned out to be negative 2.1% y/y. The market over-priced annual inflation by 350bps(!) well into the recession and even after the crisis-defining events of September 2008.On FRED we see -2 per cent for year-on-year headline CPI through July 2009....MORE
