Judging by the pickup in capital spending in recent quarters, businesses are becoming more confident in the strength and durability of the cyclical upturn. Still, over the four quarters ending in March, corporate investment in capital and inventories likely fell short of rapidly rising cash flow for the first time, over a comparable period, since the mid-1970s. Corporate debt expansion has accordingly been tepid.
First, measuring economic slack is fraught with well-known difficulties. Second, both theory and empirical studies suggest that the wage-inflation pass-through varies over time and depends on many factors. Arguably, the structural changes under way in advanced economies imply that the pass-through may be on the decline.