Price-Wage_Sector-1688740643.0815399

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Nov 24, 2024

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Fed's baseline projections and OPEC Student name Institutional affiliation Course Date

Part I 1. Headline PCE inflation, core PCE inflation, and ECI wages growth through 2025Q4, Through Q4 of 2025, the core PCE inflation was estimated at a yearly rate; this estimation projects that the rate of employment will increase by approximately 1.2% by the end of 2025. The cooling in wage increases would build up through the latter half of the year, assisting in moderating consumer demand. Throughout this framework, the core PCE inflation rate would drop from its present three-month yearly rate of 5% to around 3% by the end of the year and get back to 2.5% by mid-2025. The employment cost index (ECI) wage growth through 2025Q4 rose by 1% in the fourth quarter, which was 1.1% less than the expectation and slower than the third quarter of 2025. Salaries and wages in Q4 also increased by 1%, down from 0.3%, whereas benefits costs rose by approximately 0.8%, down from 1% in Q3. The Core PCE inflation peaked in Q1 and was projected to reduce to below 4% in Q4 2025 and by 2.4% by the end of the year. The month-to-month parity of the mean PCE leads to core PCE inflation. 1 16 31 46 61 76 91 106 121 136 151 166 181 196 211 226 241 256 271 286 301 316 331 346 361 -40000 -20000 0 20000 40000 60000 80000 100000 120000 2025Q4

Figure 1: Headline PCE inflation, core PCE inflation, and ECI wages growth through 2025Q4, 2 36 70 104 138 172 206 240 274 308 342 376 410 444 478 512 546 580 614 648 682 716 750 784 818 0 2 4 6 8 10 12 14 16 PIECI Figure 2: ECI wages growth through 2025Q4, 2. The wage growth would not be permanently higher in 2025, as inflation reverts in these projections. As observed in the 2023 monthly inflation projections, the mean consumer price inflation was about 3.9% in 2023 and 3.3% in 2024. The model that causes higher wage growth and inflation to return to target is the wage-price spiral theory. The wage-price spiral theory is a macroeconomic model that describes the cause-and-effect connections between price increases (inflation) and wage increases. This model proposes that increases in wages increase disposable income, which increases demand for goods, thus causing an increase in prices. Therefore, to stop the wage-price spiral, economists and the government should favor stable inflation or price increases. The wage-price spiral often creates higher inflation than ideal. The inflammatory situation can be stopped through appropriate actions by the central bank or the Federal Reserve.

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3. The ratio of desired wage level to actual/projected wage level Based on the new Keynesian Philips wage curve, the inflation rate is considered a function of projected inflation. This implies that whenever there is high labor demand, employment becomes low and employers therefore bid wage rates up in a quick manner. Therefore, every organization and industry is constantly tempted to provide a little above the prevalent rates to get the desired labor from other industries and organizations. 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 -10000 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 Wage level 2025Q1 2025Q2 2025Q3 2025Q4 Figure 3: The ratio of desired wage level to actual/projected wage level

The first graph depicts that a higher wage rate brings a higher labor supply and lower demand; therefore, the labor price is shown by marginal resource cost, whereas the employer’s labor demand is shown by marginal revenue product. In this case, employers will constantly employ more employees as long as the marginal revenue product of the last employee surpasses the MRC. In the context of the Keynesian Philips wage curve, a recession happens when the demand level for services and goods is way lower than what is produced when there is full employment of labor. The key impact of price and wage cuts during recessions would be to reduce sales and subsequently increase employment rates. Furthermore, it is likely that the connection between unemployment and wage inflation is non-linear, and it is possible to project wage equations with both nonlinear and linear provisions to determine which offers the best fit. 4. The ratio of the desired price level to the PCE price level forecast This graph shows that the PCE price index has been specifically gauged by inflation. The personal consumption expenditures price index, which is calculated by the Federal Reserve, topped the estimates by rising by 0.3% from earlier months of 2025. The forecast shows that core inflation (PCE) is likely to drop below 4% by the end of 2025 from 5.3% presently and reduce to 2.4% by the end of 2025. Goods that are ‘supply constrained’ are likely to swing from being the main contributor to inflation in the second half of 2025, thus decreasing core PCE in the late 2025.

2 36 70 104 138 172 206 240 274 308 342 376 410 444 478 512 546 580 614 648 682 716 750 784 818 0 0.2 0.4 0.6 0.8 1 1.2 PCE Figure 4: The ratio desired price level to PCE price level forecast In Q1, there was a surge in the employment costs, up to 1.5%, and about 4.5% from the previous year. There was an advancement of 4.7% in the salaries and wages whereas benefits surged by 4.1%. This shows there was no inclusion of the government since there was an increase in the private wages from the previous year. The contribution of the wages to inflation relied on the productivity, an increase in unit labor and the resulting product price inflation to offset higher costs. Part II A Note for a Bloomberg audience An OPEC+ decision to cut supply, which has resulted in a $10 increase in the price of a barrel of oil, would keep the inflation rate high enough to permit more rate hikes. For the US economy, there would be a destruction in demand for oil, which would ultimately drive the country into a recession ( Pierru et al., 2020) . As forecasters anticipate, the cut in supply is likely to lead to a worldwide economic meltdown and cause a big spike in the prices of US gasoline.

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The hike in gas prices will be prompted by the fact that prices depend on a balance between demand and supply. A reduction of roughly 3 million barrels in a single day would amount to approximately 3% loss from the crude oil market, since the United States alone consumes about a million barrels of oil every day ( Haqeem and Zulkifli 2022) . After the oil cut, the prices will increase even further, which will greatly impact the economy. The prices are likely to rise by as much as 50 cents, which would reach as high as $4.30. This move by OPEC+ will have a very uniform impact on gasoline prices across all regions of the United States. A marked increase in the oil cut and oil prices will definitely contribute to a higher rate of inflation. This is because the costs of transport will increase, leading to increased prices for various goods ( Pierru et al., 2020) . This will ultimately push US inflation higher, which is quite different from the rate of inflation caused by increasing aggregate demand or excess growth. US consumers will realize a decrease in discretionary income as they face higher transportation costs, and economic growth will be slowed, especially if consumer spending is weak. As suggested by the law of supply and demand, which can only mean one thing, there would be higher prices for crude oil, diesel fuel, as well as heating oil and gasoline, which are produced from oil ( Pescatori and Nazer, 2022) . This decision by OPEC+ would bring the US into an era of different uncertainties as well as slow down the global economy ( Haqeem and Zulkifli 2022) . The production cut in supply will prove more impactful since it will coincide with the amplified demand in the summer. As the financial system teeters and the Federal Reserve increases interest rates, a potential worldwide economic meltdown may weaken the demand for oil and decrease the upward effect on gasoline prices ( Pierru et al., 2020) . This decision would ultimately show a key indicator of an imminent recession in the US as a result of a lack of oil.

Perhaps OPEC+ may be interested in avoiding the oversupply of oil that would accompany a downtown; every sector in the US would be impacted by the move. Since the group has a large market share, the decision will definitely lower the global oil supply, whereas the demand for oil will slump ( Pescatori and Nazer, 2022) . As witnessed in 1973, when the Arab delegates imposed an embargo on the US and other nations that backed up Israel in the course of the Yom Kippur War, a move that saw the US experience a lot of uncertainties ( Haqeem and Zulkifli 2022) . This drove the US to increase rate hikes, which slowed economic growth. Since Bloomberg is responsible for solving key world problems, they can effectively work together with individuals involved to prevent the oil cut ( Pierru et al., 2020) . They can inform OPEC+ that the oil cut would drive up gasoline prices, which would ultimately fuel inflation in the US. OPEC+ should realize that any additional oil cuts are likely to drive more tensions, which would lead to the oil-consuming nations struggling to battle inflation by increasing their borrowing costs.

References Cai, Y., Zhang, D., Chang, T. and Lee, C.C., 2022. Macroeconomic outcomes of OPEC and non- OPEC oil supply shocks in the euro area. Energy Economics , 109 , p.105975. Haqeem, D. and Zulkifli, N., 2022. The Opec Oil Price Shock Crisis (1973) And The Actions Taken By The United States. Asia Pacific Journal of Social Science Research , 7 (1). Pescatori, M.A. and Nazer, Y.F., 2022. OPEC and the Oil Market (No. 2022-2183). International Monetary Fund. Pierru, A., Smith, J.L. and Almutairi, H., 2020. OPEC’s pursuit of market stability. Economics of Energy & Environmental Policy , 9 (2).

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Price-Wage_Sector-1688740643.0815399

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