This is particularly true when the overall rate of unemployment is low. Increases or decreases in worker productivity can offset the impact of tight labor markets reported in the employment reports. For example, increases in productivity can offset inflationary pressures due to tight labor markets and increased wages. In addition, the Labor Department issues a quarterly employment cost index that shows if employers have increased wages to keep their workers. If employers have to pay more money, the expectation is that inflation can t be far behind.
Higher wages equal a higher inflation rate.
The CPI is the price of a basket of goods and services that consumers purchase. While the CPI has come under considerable criticism lately for not accurately reporting inflation at the consumer level, it remains the best measure that we have. Recently, for example, a study led by Michael Boskin, former chairman of the Council of Economic Advisors, found that the CPI overstated actual price inflation for consumers. Starting in 1998, partially in response to the Boskin report, the weighting of the CPI market basket has changed to reflect some of the Boskin report s findings. The PPI generally is a predictor of what will happen at the consumer level in the future.