Wages rise at fastest pace since 2002 as inflation continues to climb

Inflation is high and wage growth remained high through the end of 2021, setting the stage for a tough economic year in which the Federal Reserve and White House will try to maintain labor market momentum while controlling price gains.

The Personal Consumer Expenditure Index, the Fed’s preferred gauge of inflation, came in at 5.8% in December, down from 5.7% the previous month. That beat the previous month to become the fastest pace since 1982.

Inflation is moderating somewhat on a monthly basis, but its still high annual readings come at a time when wages are rising rapidly. While solid wage growth is good news for workers, it also increases the risk of long-lasting high inflation: companies may raise prices to try to cover rising labor costs.

The Employment Cost Index, a measure of wages and benefits that the Fed watches closely, rose 1% in the last quarter of 2022 from a year earlier. Although that was a smaller gain than economists had expected of 1.2% in a Bloomberg survey, it capped a solid year of gains: the gauge increased by 4% for the year to the fourth quarter, with its wage and salary measure rising 4.5%.

This marked the fastest rate of increase in overall compensation and the wage and salary measure since the data series began two decades ago.

Price hikes are eating away at consumer confidence even as wages rise, making inflation a political liability for the Biden administration and Democrats during a midterm election year. While the White House took not aimed at relieving pressure on strangled supply chains, the task of slowing demand to bring prices under control falls primarily to the Fed.

Fed policymakers have signaled they will likely start raising interest rates at their March meeting as they try to keep today’s rapid price increases from becoming a more permanent feature of the market. economic landscape. Markets are nervously watching the Fed’s next steps, trying to gauge how much it will raise rates and how quickly. Higher borrowing costs could slow economic growth and depress stock prices, taking away some of the momentum from the US expansion.

Economists expect inflation to ease this year, although tangled supply chains make it difficult to determine when that will happen. The global trading system remains under severe stress, based on various measures, including a produced by the Federal Reserve Bank of New York which integrates arrears, delivery times and stocks.

Inflation has accelerated as people buy more goods, helped by repeated government relief checks and other federal benefits. Factories and shipping companies around the world are struggling to keep up with demand, which has led to higher prices for cars, lumber and clothing.

Rents have also started to pick up recently, a sign that price gains are broadening and could last longer than economists had expected. Rising food and gasoline prices may offer less insight into the future, given how prices fluctuate in these categories, but it makes for a painful time for households.

As inflation uncertainty persists and another wave of the virus prevents a return to normal life, several measures of consumer confidence have shown people becoming less optimistic. the University of Michigan survey showed that sentiment is weakening as prices have risen, and The Conference Board Index ticked in January.

“You have very high inflation, so people are seeing an erosion of their purchasing power,” said Dana M. Peterson, chief economist at the Conference Board, noting that the resurgence of the virus is also to blame. “People will have more confidence once we get beyond Omicron.”

Fed officials and Wall Street economists expect price gains to fade this year, but it’s unclear how much or how quickly they will. The central bank forecast inflation of 2.6% by the end of the year at its December meeting, but Jerome H. Powell, the Fed Chairman, said this week that the situation was likely to have deteriorated. slightly worse since then.

“We are mindful of the risks that persistent real wage growth outpacing productivity could put upward pressure on inflation,” Powell said. said at a press conference Wednesday.

In December, Mr Powell specifically cited the old employment cost index – which had reached a high in the third quarter – as one of the reasons the Fed had decided to switch from fueling the growth to the preparation of the response if inflation were to continue.

The fact that the measure did not accelerate as strongly as expected in the last quarter of the year could give investors some confidence that the central bank’s policy-setting group, the Federal Open Market Committee, will not further accelerate its economic withdrawal plans to help.

“With labor force participation gradually rising and excess demand measures flattening in recent months, it is reasonable to expect that wage growth is unlikely to pick up dramatically,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, after the publication. “In the meantime, this report eases the immediate pressure on the FOMC to act aggressively.”

Omair Sharif, founder of Inflation Insights, wrote in a research note following the publication that a slowdown in financial services incentive compensation was a significant factor in moderating wage and salary increases for workers in the sector. private.

“Meanwhile, inflation continued to hammer wage growth,” he wrote, noting that inflation had eaten away at wages the most in areas such as education and manufacturing.

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