INSIGHTS: The Link Between Inflation and the Value of Plant

Jack L. Treynor

Volume 12, Number 2, Second Quarter 2014

When negotiators have fixed the money wage, if the central bank wants to change the level of money prices, it has to change the real wage. But the real wage changes whenever the identity—hence the age and productivity—of the marginal plant changes. On the other hand the scarcity rents on younger, more productive plant are measured relative to the marginal plant. Investors who understand this link won’t wait for central bank action to adjust their forecasts of the rents.