Steven Mnuchin had a curious reason for why people shouldn't be worried about the economy under Trump

  • Treasury Secretary Steven Mnuchin said a the recent uptick in wage growth data doesn’t necessarily mean inflation is coming.
  • Mnuchin’s comments come after recent stock market volatility, fuelled in part by inflation concerns.
  • The insistence that wages can rise without a coincidental inflation increase runs counter to basic economic theory, though there are some exceptions.

Treasury Secretary Steven Mnuchin on Thursday said people should be excited about wage growth for Americans workers and stop worrying so much about inflation.

In an interview with Bloomberg, Mnuchin said recent data showing a boost in wages for workers shouldn’t make investors concerned about an uptick in inflation.

“There are a lot of ways to have the economy grow,” Mnuchin told Bloomberg. “You can have wage inflation and not necessarily have inflation concerns in general.”

Economic theory dictates that as wages increase, companies typically boost prices. Since people are making more money, they are less sensitive to the price increases, creating a virtuous cycle of inflation.

Data from January showed that both average hourly earnings and the consumer price index, a key inflation measure, increased at a faster clip than expected.

This data has in turn been blamed for the recent volatility in the stock market. Investors worry rising wages could cut into corporate profit margins, boost inflation, and cause the Federal Reserve to increase interest rates at a swift pace that could slow economic growth.

To Mnuchin’s point, there have been exceptions to the links between wages and inflation. For instance, corporations receiving a boost from corporate tax cuts may choose to absorb the wage growth into their margins instead of concurrently raising prices. This could slow price increases and possibly tamp down rising inflation.

Additionally, inflation (and wage growth) has consistently undershot expectations during the current economic cycle, so a healthy amount of scepticism is probably appropriate for a short-term uptick in the data.

Mnuchin also attempted to assuage concerns that the fiscal stimulus from the GOP tax law would contribute to the inflation cycle, saying it simply delivered on a promise to boost wages for middle-class Americans.

But many major investors were sceptical of Mnuchin’s claim that wage growth can keep heading higher without inflation following.

“Mnuchin: policies will raise wages w/out inflation,” tweeted billionaire bond investor Jeffrey Gundlach. “Yeah, sure. And we are going to expand the Buffalo Art Museum without making it bigger.”

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