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Please Ban The Term "wage Inflation" Forever

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Please will people stop saying "wage inflation" in the forums; in economic terms it is meaningless.

Inflation is a persistent change in the value of money, your £1 today buys less goods than your £1 ten years ago.

"wage inflation" (ie growth in nominal wage rates) consists of two parts - "true inflation" (my term) plus real income growth. It is obviously not the same thing.

"Wage inflation" does not erode the real value of your debts it is inflation that does that; the growth in real wages just makes your debts more affordable.

As an example, if I obtain a professional qualification that results in a 25% pay increase then my wage has not inflated, instead my earnings power has increased as a result of my new qualification. My £100,000 mortgage is not reduced in any way but I am better off due to my higher earnings power.

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Guest donall

Please will people stop saying "wage inflation" in the forums; in economic terms it is meaningless.

Inflation is a persistent change in the value of money, your £1 today buys less goods than your £1 ten years ago.

"wage inflation" (ie growth in nominal wage rates) consists of two parts - "true inflation" (my term) plus real income growth. It is obviously not the same thing.

"Wage inflation" does not erode the real value of your debts it is inflation that does that; the growth in real wages just makes your debts more affordable.

As an example, if I obtain a professional qualification that results in a 25% pay increase then my wage has not inflated, instead my earnings power has increased as a result of my new qualification. My £100,000 mortgage is not reduced in any way but I am better off due to my higher earnings power.

If you stop thinking from a wage recipient and think from an employers perspective, you can think of wage inflation in the same way as you think of RPI or HPI.

If you look at how the RPI, HPI and Wage inflation behave you can see that if average wages have risen by say 30% in the last 5 years and houses by 100% and RPI by 18% that XYZ.

Generally you'd hope that what your wages increase by is greater than what things cost - otherwise you a getting poorer. Actually defining inflation is a hard enough thing (e.g. what makes up an average shopping basket) something that i have had some experience of. Wage inflation is simple and in economic terms it does have meaning.

It mightn't suit your narrow definition - but if you can make up your own economic terms then you can get to grips with WI.

If WI isn't a meaningful concept for you - how does the Big Mac Index go down???

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Please will people stop saying "wage inflation" in the forums; in economic terms it is meaningless.

Inflation is a persistent change in the value of money, your £1 today buys less goods than your £1 ten years ago.

"wage inflation" (ie growth in nominal wage rates) consists of two parts - "true inflation" (my term) plus real income growth. It is obviously not the same thing.

"Wage inflation" does not erode the real value of your debts it is inflation that does that; the growth in real wages just makes your debts more affordable.

As an example, if I obtain a professional qualification that results in a 25% pay increase then my wage has not inflated, instead my earnings power has increased as a result of my new qualification. My £100,000 mortgage is not reduced in any way but I am better off due to my higher earnings power.

Errm no.

Inflation is the EXCESS increase in the money supply over that necessary to maintain price levels in consideration of any increase in real GDP.

The equation is:

velocity x money supply = real GDP x GDP deflator

as given in Wikipedia.

Basically, if a tailor sells £1000 worth of clothes in a year he adds £1000 to GDP. If the butcher then sells him £1000 worth of meat in a year, he also adds £1000 to GDP. If the money supply is £1000 (ie the tailor and the butcher are the only two traders and they trade with each other) then the velocity is two (the £1000 exchanges hands twice over). With no increase in inflation the GDP deflator is 1 and real GDP is £2,000.

If the money supply doubles without any real increase in GDP, then the headline GDP also doubles as prices increase due to the "more money chasing the same amount of goods" phenomenon, but the GDP deflator becomes 2 indicating a doubling of prices.

Wage inflation is a valid term referring to increases in wage demands usually caused by rising prices (or "price inflation") as it distinguishes between the pedantic meaning of inflation, the increase in money supply NOT the increase in prices as you suggest.

You are also wrong because "wage inflation" DOES devalue your debts. Your own example demonstrates the exact opposite of your own claim.

Note: It is also "fewer goods" NOT "less goods" and you have skid marks in your pants.

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economics can deal with several different things in the economy there is two main things quantity and prices. prices are just the expression of one quantity (e.g a goods and services like for instance beer/sex/wages) in terms a corresponding quantity of money.

wage "inflation" is just the change in the unit cost of labor, only some one silly would think that the actual quantity and quality of work goes up in an economy year after year yet payrises are the norm. this is simply an effect on the degrading quality of the money which is bought about by an increase in its supply .e.g. to fund the war on terror etc. etc.

why not just call it the change in unit labor costs. since only a increase in the supply of money is "true" inflation, in the monetarist sense of the word.

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Wage inflation makes sense to me - it's the increase in the cost of labour, ie what labour you can buy for your pound compared to last year.

If you regard inflation as an increase in the money supply then yes, it's incorrect, but then so would any use of the term inflation that wasn't congruent with that. Wage inflation is prefectly fine has a clear meaning, if o significance to the economy and is in common usage.

Edited by the_duke_of_hazzard

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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