Household incomes and inflation… In an inflation environment, while incomes are defeated by prices, the behavioral patterns that consumers create within the concept of demand are important. While the Fed is expected to fight inflation by using the interest weapon, the concept of employment is also attributed to the continuity of income. As we have seen, the level of real wages, of course, also affects real expenditures, and at this point, if consumers cannot increase their income as much as inflation, they will show their behavior to adapt to new prices.
Real and nominal expenditure demand effect… In cases where the real wage increase is negative (nominal wage increase cannot catch up with inflation), consumers will either reduce unit consumption and make the same expenditure, or they will use their savings to melt the cash. First, because it actually reduces real consumption, it slows down the economy through the phenomenon of demand. Nominal spending is the same, but money is less valuable and reduced purchasing power is actually leading to less consumption on a per-unit basis. You can demand less goods and services with the money you have. In terms of the reducing effect of autonomous consumption, the contribution of households to the economy decreases and has a slowing effect. Latter; you keep real spending by putting savings into action, but the resource here is limited (as much as individual deposit accounts). This is also not sustainable.
Employment, permanent income effect, Fed tightening dosage… The improvement in the process leading to full employment is of course important in terms of improving the income situation for households. In the long-term relationship, the balance with inflation should be read as NAIRU (natural unemployment rate, non-inflationary unemployment). According to the Phillips curve, when unemployment is above this level, the inflation rate will decrease, and below NAIRU, the inflation rate will increase.
Looking at the emerging employment, inflation and growth dynamics of the Fed, there is a possibility of tightening the growth by tightening excessively, or by making a movement that falls far behind the inflation curve, or by inaction and disrupting the inflation balance. This perspective also underlies the fact that it does not take a step back from tightening despite the growth risks and prioritizes it more.
Conclusion? Rising inflation and wages that cannot increase at this rate will force households to make a difficult choice. The 1st possibility will compromise the quality of life and behave in accordance with his budget. The 2nd probability will decrease in savings and they will accept to buy the services and products more expensive. However, we would like to point out that the second possibility is not a very sustainable situation.
Kaynak Tera Yatırım
Hibya Haber Ajansı
