WASHINGTON, May 16 (Reuters) - Developed economies have so far skirted a damaging wage price spiral from the breakout of inflation that followed the pandemic, two top economists have concluded, with a relatively painless landing from the episode possible in some countries but not yet assured.
For the U.S. in particular, increased productivity and the drop in inflation so far "might even require no increase in unemployment" for a return to the Federal Reserve's 2% target, former Federal Reserve Chairman Ben Bernanke and former International Monetary Fund Chief Economist Olivier Blanchard wrote in a new paper published Thursday by the Peterson Institute for International Economics, where Blanchard serves as a senior fellow.
For other countries whose job markets are adjusting in different ways than the U.S., "navigating the last mile (of inflation control) may require accepting an increase in unemployment, at least for some time."
But they acknowledge that much remains uncertain - and remark in a footnote that Blanchard's earlier argument about the need for higher unemployment to control U.S. inflation "has been proven wrong."
He had written in July of 2022 along with former Treasury Secretary Lawrence Summers that "there is no magic tool" to cool inflation without rising joblessness. The unemployment rate was 3.5% that month; it was 3.9% in April, below most estimates of full employment, while inflation has fallen by more than half.
In other countries, they said, inflation has been falling faster than their model projected.
Extending an analysis first done last year about the U.S., the paper found that the spike in inflation that began in 2021 after the onset of the COVID-19 pandemic had largely shared roots in supply shortages and commodity price shocks across the euro area, Japan, the United Kingdom and Canada .
By contrast, "the labor market generally played a limited role in the evolution of price inflation" even though job market conditions became tighter almost across the board.
"There is little evidence, in any economy, that a wage-price or price-wage spiral emerged," Bernanke and Blanchard wrote, citing that as one reason why it has proved easier to combat inflation this time than in the 1970s when wages and prices leveraged each other higher and central banks were less trusted to keep prices stable.
In this case, inflation fell fast as energy and food shocks dissipated, and left little apparent lasting impact on public expectations about prices or, at least so far, on wage demands - a victory for the view that was known in the early stages of the inflation debate as "Team Transitory."
Whether that remains the case as policymakers push toward the endgame of their inflation fight, with top central bankers already planning their first rate cuts, is still open for debate, a nod to the concerns raised by "Team Permanent."
"Precisely how costly the last mile might be is not yet resolved," they wrote, particularly since, in their analysis, rising wages feed into prices only slowly, with an impact that builds over time and may yet show itself. "Some countries may need some loosening of labor market conditions to achieve their inflation targets."
(Reporting by Howard Schneider; Editing by Andrea Ricci)
