Tight Product Markets, Not Tight Labor Markets, Are Pushing Up Inflation Around the World

Soaring job vacancies have been widely cited as an indication of overheated labor markets pushing up wages and inflation. But have tight labor markets and rising wage rates been the main drivers of the recent surge in inflation? The US evidence for this Phillips curve story is mixed at best. In this report, we examine the international evidence and ask: Have economies with larger increases in wage growth since the beginning of the pandemic experienced larger increases in core inflation? We find the answer is no. Although there is a strong correlation between job vacancies and core inflation across countries, there is only a tenuous correlation between nominal wage growth and core inflation. We conclude that rising job vacancies are proxies for rising aggregate demand, which has pushed up prices of intermediate inputs and markups over cost. Central banks may still need to tighten monetary policy to restrain inflation, but large increases in unemployment may not be necessary to bring inflation under control