For an inflation hawk, Greenspan has exhibited remarkable patience and pragmatism when figuring out what to do with interest rates. He's been incredibly vocal about how technology has improved productivity, allowing businesses to pay employees higher real wages while keeping other costs well in check. He's also watched the ever-tightening labor markets with concern but with a keen eye for how a strong economy actually increases the potential labor force by bringing discouraged workers back into the market. While there appears to be considerable expectation in the business community, and possibly Wall Street, that the productivity acceleration has not yet peaked, experience advises caution. It offers the two sides to the story.
Wages rising faster than productivity is inflationary.
Without rising prices, there is no inflation. A conundrum, indeed. Greenspan's comments tomorrow morning before the Joint Economic Committee of Congress will be as closely watched as today's CPI since he should offer some clues about what the Fed will do in two weeks. The Motley Fool. All rights reserved.