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Pass-Through of Wages and Import Prices Has Increased in the Post-COVID Period

Annual CPI inflation reached 9.1 percent in June 2022, the highest reading since November 1981. The broad-based nature of the recent inflation readings…

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Annual CPI inflation reached 9.1 percent in June 2022, the highest reading since November 1981. The broad-based nature of the recent inflation readings has increased concerns that inflation may run above the Federal Reserve’s target for a longer period than anticipated. In this post we use detailed industry-level data to examine two prominent cost-push-based explanations for high inflation: rising import prices and higher labor costs. We find that the pass-through of wages and input prices to the U.S. Producer Price Index has grown during the pandemic. Both the large changes in these costs and a higher pass-through into domestic prices have contributed toward higher inflation.

Aggregate Facts

We plot the evolution of the core cumulative consumer price index (core CPI) in the United States starting from the business cycle trough, as defined by the peak unemployment rate, for each of the past six economic expansions for core goods inflation and core services inflation in the chart below. The pick-up in core goods inflation in the current expansion is the strongest across all expansions since the 1970s. In the post-COVID period, goods prices have risen by 16 percent within only eight quarters since the unemployment peak. The pick-up in service prices is more modest, but has accelerated recently. The strong growth in goods versus services prices over most of the recent period is a reversal of the typical inflation dynamics over the last twenty years, which, as shown in earlier work, were characterized by firming up of services prices and essentially no pick-up in goods prices despite robust recoveries in unemployment. On the contrary, goods inflation picked up briskly in 2021 and far exceeded services inflation.

Core Goods and Core Services Prices Have Risen Sharply

Chart: side by side: left cumulative price growth y axis of core goods inflation. right core services inflation. X axis is 0-20 quarters since peak unemployment rate. range is 1975-2022.
Source: U.S. Bureau of Labor Statistics and authors’ calculations.
Notes: The left panel plots the cumulative core goods CPI inflation (All items less food and energy, seasonally adjusted) against time, starting at the quarter of peak unemployment of a given recession. The right panel plots the cumulative core services inflation (All items less energy services) against time.

Two important factors that could drive the high inflation rate in the current era are rising import prices due to supply chain bottlenecks and strong wage growth, both in the goods and in services sectors. We next provide several charts that illustrate these trends.

The left panel of the chart below plots the price index of U.S. import prices by end-use category, normalized to 100 in February 2020. The chart illustrates that the import prices of all categories have picked up, leading to a rise in average import prices by more than 10 percent since early 2020. Import prices affect U.S. inflation both because imports are used as inputs in domestic production and because foreign firms directly compete with U.S. firms in final goods markets. The chart highlights that both foreign input and output prices have increased. Import prices have risen by nearly 50 percent for industrial supplies and materials since early 2020. These products are used as inputs in a broad range of industries. Prices of final consumer goods and capital goods have also grown throughout 2021, but are currently only about 3 percent higher than at the beginning of the COVID pandemic.

The right panel of the chart shows weekly nominal wages from the BLS, separately for goods-producing and services-providing workers, indexed to the first quarter of 2020. The chart highlights that nominal wage growth has accelerated in the recent period, in particular in service-providing industries.

Import Prices and Wages Have Grown Significantly

Chart: side by side charts: import prices left, nominal weekly wages right. Y axis of left chart is import price index with x axis 2014-20; right chart y axis is CES weekly wages (nominal) x axis 2010-2022. indexed to 2020 Q1.
Sources: U.S. Bureau of Labor Statistics, Haver Analytics, and authors’ calculations.
Notes: The left panel plots import prices by end-use category from January 2014 to May 2022. The import price indexes are all indexed to 100 in February 2020 to coincide with the beginning of COVID-19 in the U.S. We exclude fuels because they are generally highly volatile. The share of each category of total imports in 2017 were: foods, feeds, and beverages comprise 6%, industrial supplies and materials 14%, capital goods 30%, autos, parts, and engines 17%, and consumer goods 28%. The right panel shows nominal weekly wages for services-providing and goods-producing workers, indexed to 2020:Q1.

What is causing these wage pressures? Recent work suggests a tight labor market as one of the main drivers. The next chart plots the time series of the Employment Cost Index (ECI) against the vacancy-to-hires ratio, which we use to proxy for the tightness of the labor market, in the manufacturing sector (left panel) and in the services sector (right panel). The ECI is a better measure of compensation growth than weekly wages because it accounts for shifts in industry and occupational composition of the workforce, and it includes benefits. The charts point to a strong relationship between labor market tightness and compensation growth in both the manufacturing and services sectors.

Compensation Growth is Correlated with Labor Market Tightness

Chart: $Q ECI change left scale; vacancies per hire right scale. Left chart is Manufacturing, right chart is services. 200-2020
Source: U.S. Bureau of Labor Statistics and authors’ calculations.
Notes: Vacancies per hire is calculated using JOLTS vacancies and hires. The four-quarter percent change in ECI is obtained from the total compensation employment cost index for private industry workers in the corresponding sector.

Methodology

We now investigate how the changes in import prices and wages we have documented can affect U.S. domestic prices. We draw on a 2019 study that showed that changes in import prices can affect firms’ prices via two channels: (i) strategic complementarities and (ii) marginal cost. The first channel captures how much domestic firms adjust their prices in response to changes in the prices charged by their domestic competitors. For example, if the price of imported cars increases, domestic car producers can also increase their prices. The marginal cost channel captures how much domestic prices change in response to changes in input costs. These are affected by both intermediate inputs, either imported or domestic, and wages. For example, when the price of imported steel or the wage of production workers goes up, this affects the cost of producing cars, which feeds through to higher prices of domestically produced cars.

The 2019 study was able to isolate strategic complementarities and marginal cost using a rich firm-level data set for Belgium. We apply that framework to the U.S. economy using industry-level data, since firm-level U.S. data are unavailable to us. Even though we will not be able to establish a causal relationship, we nevertheless uncover some interesting correlations.

We use industry-level producer price indexes (PPI) as our measure of industry inflation because a clear mapping between international products and domestic industry categories is available for the PPI, but not for the consumer price index (CPI). The PPI measures the price received by domestic producers for their goods or services, comprising both final goods and intermediate goods. It is constructed by the U.S. Bureau of Labor Statistics (BLS) from a monthly survey of establishments representing nearly the entire goods sector. We construct an import price index for foreign competitors’ using disaggregated import data from the Census Bureau. We obtain an input price index for domestic and foreign inputs by applying the input-output matrix, from the Bureau of Economic Analysis (BEA), to import prices and domestic prices. We construct industry wages using average weekly earnings from the Quarterly Census of Employment and Wages (QCEW) from the BLS. Our analysis covers 341 “traded” industries (with positive imports in at least one year), mostly in manufacturing, and 192 “non-traded” industries, mostly in services, at the level of industry categories that are used to construct input-output tables by the BEA.

The Comovement of Domestic Prices, Import Prices, and Wages

We analyze the effects of rising input prices and wages on U.S. producer prices via the strategic complementarities and marginal cost channel using regression analysis. Since the correlation between import prices, wages, and domestic producer prices increased sharply in 2021, we allow the pass-through to differ relative to the earlier period of 2013-20 by including an interaction effect for 2021. In the table below, we illustrate our results by considering how prices in the United States would be affected if competitors’ prices, input prices, and wages were to rise by 10 percent, separately for traded and non-traded industries.

We begin by discussing the traded sector. First, we find that the strategic complementarity channel has significantly strengthened in 2021. For an industry with the average import share of 31 percent, a 10 percent increase in foreign competitors’ prices would normally lead to an increase in producer prices of about 0.5 percent between 2013 and 2020; whereas in 2021, it resulted in a producer price increase of 2 percent—4 times as large.

Second, we find positive and significant pass-through from input prices to industry prices. A 10 percent increase in input prices increased producer prices by 2.4 percent pre-2021 and 4 percent in 2021.

Third, we see that prior to 2021 pass-through from wages to producer prices was approximately zero in tradeable industries. This relationship has strenghthened significantly in 2021, when a 10 percent increase in wages was associated with a 1.4 percent rise in producer prices.

Pass-Through from Import Prices to Domestic PPI more than Doubled during COVID Period

Effect of a 10 Percent Change in Strategic Complementarities, Input Prices, and Wages on PPITraded Industries (Percent)
2013-2020
2021Non-Traded Industries (Percent)
2013-2020
2021
1. Strategic complementarities channel (average share of imports = 0.31) 0.542.04
2. Marginal cost channel2.475.321.633.41
Input price channel2.363.950.940.98
Wage channel0.111.370.692.43
Total effect (row 1 + row 2)3.017.361.633.41
Source: Authors’ calculations.

Summing across the three effects, we see that a 10 percent increase in import prices and wages is associated with a 7.4 percent increase in PPI in 2021, compared to only a 3 percent increase in the earlier period. Most of the effect (around 70 percent) flows through the marginal cost channel. The finding that the marginal cost channel dominates the strategic complementarities channel is consistent with other studies.

We next turn to the non-traded sector. By definition, the strategic complementarities channel is not active for non-traded industries since there are no foreign competitors. First, we find that a 10 percent increase in input prices increased producer prices by roughly 1 percent in 2021. In contrast to the traded sector, we do not find a significant pick-up in input price pass-through compared to the earlier period.

Second, similar to the traded sector, the relationship between wages and prices strengthened significantly in 2021 in non-tradebles. A 10 percent increase in wages is associated with a 2.4 percent rise in producer prices in 2021, compared to only 0.7 percent in prior years.

A caveat to our regression results is that they are subject to omitted variable bias (due to the lack of domestic competitors’ prices) and endogeneity of both input prices and wages. We are most concerned about the endogeneity of input prices, since both the left-hand side and the right-hand side of our regression contain domestic prices. We therefore perform an instrumental variables regression using imported input prices as an instrument for overall input prices, and find larger pass-through of input prices than in the baseline. This is consistent with prior work, where we instrumented for input prices with tariff changes in an earlier period and found that it produced larger pass-through.

Overall, our results indicate that imported input prices and wages have had a significant effect on U.S. domestic prices in recent months. This large effect stems both from their relatively larger increases and a higher pass-through rate. In addition, prices in the traded sector have become more correlated with foreign competitors’ prices, most likely because all firms are experiencing the same shocks.

Mary Amiti is the head of Labor and Product Market Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Sebastian Heise is a research economist in Labor and Product Market Studies in the Federal Reserve Bank of New York’s Research and Statistics Group. 

Fatih Karahan is a former economic research advisor in Labor and Product Market Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Ayşegül Şahin is the Richard J. Gonzalez Regents Chair in Economics at the University of Texas at Austin.

How to cite this post:
Mary Amiti, Sebastian Heise, Fatih Karahan, and Ayşegül Şahin, “Pass-Through of Wages and Import Prices Has Increased in the Post-COVID Period,” Federal Reserve Bank of New York Liberty Street Economics, August 23, 2022, https://libertystreeteconomics.newyorkfed.org/2022/08/pass-through-of-wages-and-import-prices-has-increased-in-the-post-covid-period/.


Disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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International

The next pandemic? It’s already here for Earth’s wildlife

Bird flu is decimating species already threatened by climate change and habitat loss.

I am a conservation biologist who studies emerging infectious diseases. When people ask me what I think the next pandemic will be I often say that we are in the midst of one – it’s just afflicting a great many species more than ours.

I am referring to the highly pathogenic strain of avian influenza H5N1 (HPAI H5N1), otherwise known as bird flu, which has killed millions of birds and unknown numbers of mammals, particularly during the past three years.

This is the strain that emerged in domestic geese in China in 1997 and quickly jumped to humans in south-east Asia with a mortality rate of around 40-50%. My research group encountered the virus when it killed a mammal, an endangered Owston’s palm civet, in a captive breeding programme in Cuc Phuong National Park Vietnam in 2005.

How these animals caught bird flu was never confirmed. Their diet is mainly earthworms, so they had not been infected by eating diseased poultry like many captive tigers in the region.

This discovery prompted us to collate all confirmed reports of fatal infection with bird flu to assess just how broad a threat to wildlife this virus might pose.

This is how a newly discovered virus in Chinese poultry came to threaten so much of the world’s biodiversity.

H5N1 originated on a Chinese poultry farm in 1997. ChameleonsEye/Shutterstock

The first signs

Until December 2005, most confirmed infections had been found in a few zoos and rescue centres in Thailand and Cambodia. Our analysis in 2006 showed that nearly half (48%) of all the different groups of birds (known to taxonomists as “orders”) contained a species in which a fatal infection of bird flu had been reported. These 13 orders comprised 84% of all bird species.

We reasoned 20 years ago that the strains of H5N1 circulating were probably highly pathogenic to all bird orders. We also showed that the list of confirmed infected species included those that were globally threatened and that important habitats, such as Vietnam’s Mekong delta, lay close to reported poultry outbreaks.

Mammals known to be susceptible to bird flu during the early 2000s included primates, rodents, pigs and rabbits. Large carnivores such as Bengal tigers and clouded leopards were reported to have been killed, as well as domestic cats.

Our 2006 paper showed the ease with which this virus crossed species barriers and suggested it might one day produce a pandemic-scale threat to global biodiversity.

Unfortunately, our warnings were correct.

A roving sickness

Two decades on, bird flu is killing species from the high Arctic to mainland Antarctica.

In the past couple of years, bird flu has spread rapidly across Europe and infiltrated North and South America, killing millions of poultry and a variety of bird and mammal species. A recent paper found that 26 countries have reported at least 48 mammal species that have died from the virus since 2020, when the latest increase in reported infections started.

Not even the ocean is safe. Since 2020, 13 species of aquatic mammal have succumbed, including American sea lions, porpoises and dolphins, often dying in their thousands in South America. A wide range of scavenging and predatory mammals that live on land are now also confirmed to be susceptible, including mountain lions, lynx, brown, black and polar bears.

The UK alone has lost over 75% of its great skuas and seen a 25% decline in northern gannets. Recent declines in sandwich terns (35%) and common terns (42%) were also largely driven by the virus.

Scientists haven’t managed to completely sequence the virus in all affected species. Research and continuous surveillance could tell us how adaptable it ultimately becomes, and whether it can jump to even more species. We know it can already infect humans – one or more genetic mutations may make it more infectious.

At the crossroads

Between January 1 2003 and December 21 2023, 882 cases of human infection with the H5N1 virus were reported from 23 countries, of which 461 (52%) were fatal.

Of these fatal cases, more than half were in Vietnam, China, Cambodia and Laos. Poultry-to-human infections were first recorded in Cambodia in December 2003. Intermittent cases were reported until 2014, followed by a gap until 2023, yielding 41 deaths from 64 cases. The subtype of H5N1 virus responsible has been detected in poultry in Cambodia since 2014. In the early 2000s, the H5N1 virus circulating had a high human mortality rate, so it is worrying that we are now starting to see people dying after contact with poultry again.

It’s not just H5 subtypes of bird flu that concern humans. The H10N1 virus was originally isolated from wild birds in South Korea, but has also been reported in samples from China and Mongolia.

Recent research found that these particular virus subtypes may be able to jump to humans after they were found to be pathogenic in laboratory mice and ferrets. The first person who was confirmed to be infected with H10N5 died in China on January 27 2024, but this patient was also suffering from seasonal flu (H3N2). They had been exposed to live poultry which also tested positive for H10N5.

Species already threatened with extinction are among those which have died due to bird flu in the past three years. The first deaths from the virus in mainland Antarctica have just been confirmed in skuas, highlighting a looming threat to penguin colonies whose eggs and chicks skuas prey on. Humboldt penguins have already been killed by the virus in Chile.

A colony of king penguins.
Remote penguin colonies are already threatened by climate change. AndreAnita/Shutterstock

How can we stem this tsunami of H5N1 and other avian influenzas? Completely overhaul poultry production on a global scale. Make farms self-sufficient in rearing eggs and chicks instead of exporting them internationally. The trend towards megafarms containing over a million birds must be stopped in its tracks.

To prevent the worst outcomes for this virus, we must revisit its primary source: the incubator of intensive poultry farms.

Diana Bell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked…

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked by the NY Fed Consumer Survey extended their late 2023 slide, with 3Y inflation expectations in January sliding to a record low 2.4% (from 2.6% in December), even as 1 and 5Y inflation forecasts remained flat, moments ago the NY Fed reported that in February there was a sharp rebound in longer-term inflation expectations, rising to 2.7% from 2.4% at the three-year ahead horizon, and jumping to 2.9% from 2.5% at the five-year ahead horizon, while the 1Y inflation outlook was flat for the 3rd month in a row, stuck at 3.0%. 

The increases in both the three-year ahead and five-year ahead measures were most pronounced for respondents with at most high school degrees (in other words, the "really smart folks" are expecting deflation soon). The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at all horizons, while the median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—declined at the one- and three-year ahead horizons and remained unchanged at the five-year ahead horizon.

Going down the survey, we find that the median year-ahead expected price changes increased by 0.1 percentage point to 4.3% for gas; decreased by 1.8 percentage points to 6.8% for the cost of medical care (its lowest reading since September 2020); decreased by 0.1 percentage point to 5.8% for the cost of a college education; and surprisingly decreased by 0.3 percentage point for rent to 6.1% (its lowest reading since December 2020), and remained flat for food at 4.9%.

We find the rent expectations surprising because it is happening just asking rents are rising across the country.

At the same time as consumers erroneously saw sharply lower rents, median home price growth expectations remained unchanged for the fifth consecutive month at 3.0%.

Turning to the labor market, the survey found that the average perceived likelihood of voluntary and involuntary job separations increased, while the perceived likelihood of finding a job (in the event of a job loss) declined. "The mean probability of leaving one’s job voluntarily in the next 12 months also increased, by 1.8 percentage points to 19.5%."

Mean unemployment expectations - or the mean probability that the U.S. unemployment rate will be higher one year from now - decreased by 1.1 percentage points to 36.1%, the lowest reading since February 2022. Additionally, the median one-year-ahead expected earnings growth was unchanged at 2.8%, remaining slightly below its 12-month trailing average of 2.9%.

Turning to household finance, we find the following:

  • The median expected growth in household income remained unchanged at 3.1%. The series has been moving within a narrow range of 2.9% to 3.3% since January 2023, and remains above the February 2020 pre-pandemic level of 2.7%.
  • Median household spending growth expectations increased by 0.2 percentage point to 5.2%. The increase was driven by respondents with a high school degree or less.
  • Median year-ahead expected growth in government debt increased to 9.3% from 8.9%.
  • The mean perceived probability that the average interest rate on saving accounts will be higher in 12 months increased by 0.6 percentage point to 26.1%, remaining below its 12-month trailing average of 30%.
  • Perceptions about households’ current financial situations deteriorated somewhat with fewer respondents reporting being better off than a year ago. Year-ahead expectations also deteriorated marginally with a smaller share of respondents expecting to be better off and a slightly larger share of respondents expecting to be worse off a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now increased by 1.4 percentage point to 38.9%.
  • At the same time, perceptions and expectations about credit access turned less optimistic: "Perceptions of credit access compared to a year ago deteriorated with a larger share of respondents reporting tighter conditions and a smaller share reporting looser conditions compared to a year ago."

Also, a smaller percentage of consumers, 11.45% vs 12.14% in prior month, expect to not be able to make minimum debt payment over the next three months

Last, and perhaps most humorous, is the now traditional cognitive dissonance one observes with these polls, because at a time when long-term inflation expectations jumped, which clearly suggests that financial conditions will need to be tightened, the number of respondents expecting higher stock prices one year from today jumped to the highest since November 2021... which incidentally is just when the market topped out during the last cycle before suffering a painful bear market.

Tyler Durden Mon, 03/11/2024 - 12:40

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Spread & Containment

A major cruise line is testing a monthly subscription service

The Cruise Scarlet Summer Season Pass was designed with remote workers in mind.

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While going on a cruise once meant disconnecting from the world when between ports because any WiFi available aboard was glitchy and expensive, advances in technology over the last decade have enabled millions to not only stay in touch with home but even work remotely.

With such remote workers and digital nomads in mind, Virgin Voyages has designed a monthly pass that gives those who want to work from the seas a WFH setup on its Scarlet Lady ship — while the latter acronym usually means "work from home," the cruise line is advertising as "work from the helm.”

Related: Royal Caribbean shares a warning with passengers

"Inspired by Richard Branson's belief and track record that brilliant work is best paired with a hearty dose of fun, we're welcoming Sailors on board Scarlet Lady for a full month to help them achieve that perfect work-life balance," Virgin Voyages said in announcing its new promotion. "Take a vacation away from your monotonous work-from-home set up (sorry, but…not sorry) and start taking calls from your private balcony overlooking the Mediterranean sea."

A man looks through his phone while sitting in a hot tub on a cruise ship.

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This is how much it'll cost you to work from a cruise ship for a month

While the single most important feature for successful work at sea — WiFi — is already available for free on Virgin cruises, the new Scarlet Summer Season Pass includes a faster connection, a $10 daily coffee credit, access to a private rooftop, and other member-only areas as well as wash and fold laundry service that Virgin advertises as a perk that will allow one to concentrate on work

More Travel:

The pass starts at $9,990 for a two-guest cabin and is available for four monthlong cruises departing in June, July, August, and September — each departs from ports such as Barcelona, Marseille, and Palma de Mallorca and spends four weeks touring around the Mediterranean.

Longer cruises are becoming more common, here's why

The new pass is essentially a version of an upgraded cruise package with additional perks but is specifically tailored to those who plan on working from the ship as an opportunity to market to them.

"Stay connected to your work with the fastest at-sea internet in the biz when you want and log-off to let the exquisite landscape of the Mediterranean inspire you when you need," reads the promotional material for the pass.

Amid the rise of remote work post-pandemic, cruise lines have been seeing growing interest in longer journeys in which many of the passengers not just vacation in the traditional sense but work from a mobile office.

In 2023, Turkish cruise line operator Miray even started selling cabins on a three-year tour around the world but the endeavor hit the rocks after one of the engineers declared the MV Gemini ship the company planned to use for the journey "unseaworthy" and the cruise ship line dealt with a PR scandal that ultimately sank the project before it could take off.

While three years at sea would have set a record as the longest cruise journey on the market, companies such as Royal Caribbean  (RCL) (both with its namesake brand and its Celebrity Cruises line) have been offering increasingly long cruises that serve as many people’s temporary homes and cross through multiple continents.

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