DAVID GREENE, HOST:
So one cause of the recent sell-off on the stock market may have been concern about inflation. So let's ask what seems like a simple question - are those fears about inflation justified? We asked NPR economic correspondent John Ydstie to help us figure this out.
JOHN YDSTIE, BYLINE: The whiff of inflation that sent the stock market tumbling came when the government reported earlier this month that over the past year wages rose 2.9 percent. That's the biggest increase in almost a decade. And that's good news for workers, says economist Gus Faucher of PNC Financial Group. But, he says, it also could be sowing the seeds of inflation.
GUS FAUCHER: Businesses are reporting that it's difficult for them to find the workers that they need so they respond by raising pay. That's obviously good news for workers, but it does raise concerns about inflationary pressures building.
YDSTIE: And, Faucher says, the big tax cut and spending package from Washington added even more fuel for economic growth. He says that's likely to push unemployment even lower and force businesses to pay even more for workers.
FAUCHER: With higher pay, businesses try to recoup that by raising the prices for the goods and services they sell. And so that leads to stronger overall inflation, which is prices throughout the economy.
YDSTIE: And that's how inflation normally ramps up. But economist Megan Greene is skeptical that classic model of wage and price inflation is working in today's economy, and she thinks the tax windfall that companies have coming could actually be used in a way that puts some downward pressure on inflation.
MEGAN GREENE: I think there's an avenue for the windfall from the tax bill that most analysts aren't considering, and that's that companies decide that they're going to try to protect their market share by cutting prices as they're trying to compete with huge conglomerates like Amazon.
YDSTIE: That windfall could allow companies to raise wages while keeping prices for goods and services they sell in check. And Greene, who's the chief economist at Manulife, says there are other powerful disinflationary forces in the economy, including globalization.
M. GREENE: There's an oversupply of cheap labor globally, and companies don't have to hire within the U.S. anymore. So that keeps upward pressure off of wages and therefore inflation. Also we've got the gig economy.
YDSTIE: Like Uber drivers or freelance writers and I.T. workers. Those contract workers can provide low-cost labor for companies. And then Greene says there's demographics.
M. GREENE: As the baby boomers are retiring, we're replacing them with much younger, cheaper workers. And so there isn't a lot of upper pressure on wages or inflation.
YDSTIE: The government's most recent reports on consumer and producer prices, issued just last week, did show inflation rising. But Greene points out that the Federal Reserve's preferred measure of inflation is still running below the level the central bank thinks is best for the economy. She says inflation will likely move higher for technical reasons in the second quarter of this year, but she predicts the increase won't last. Gus Faucher acknowledges that inflation remains below the Fed's goal, but he sees the recent uptick as a warning sign.
FAUCHER: And if we continue to see inflation accelerate then the Fed may need to raise rates more aggressively.
YDSTIE: But though fear of rising inflation and rising interest rates was blamed for the stock market sell-off, investors seemed to be saying never mind. Despite the worse-than-expected inflation reports and a rise in interest rates, stock markets have gained back more than half the ground they lost during the correction. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.