Forecasting Prices from FOMC Projections

Forecasting Prices from FOMC Projections

Most Americans are not used to paying much attention to inflation. Many price and wage changes are made on autopilot. At Florida Atlantic University, where I work, all research-active faculty members automatically receive a 2 percent raise each year. Over the last decade, this has generally offset the effects of inflation and provided a modest real wage increase to compensate for additional experience. A lot of employers have adopted similar strategies. And, even in cases where such strategies have not been explicit, employers and employees seem to have come to expect some given rate of increase in wages each year, from which negotiations related to more specific factors might begin.

Employers and employees choosing to adjust wages on autopilot have done so for good reason: it lowers the cost of recontracting. And, since inflation had not varied much from…

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