Surprise Jump in U.S. Wages Gives Inflation Debate a New Twist
An unexpected jump in U.S. wages has given financial markets a new reason to worry that higher inflation may be here to stay.
Consumer prices are rising quickly as the economy reopens after the pandemic. A closely watched data release on Thursday is expected to show prices rose another 0.4% in May -- pushing annual inflation above April’s 4.2%, already the highest in more than a decade.
Many policy makers and economists see the price spike as temporary –- partly because they haven’t been anticipating much in the way of wage growth, which has been relatively stagnant for years at the lower end of the pay scale.
Employment is still way down from pre-pandemic levels, suggesting an ample pool of workers from which to draw, and most jobs being created right now are in low-wage industries like restaurants and tourism.
But last week’s jobs report showed a larger-than-forecast pickup in average hourly wages for a second straight month. It turns out that whatever the unemployment numbers say, there’s a shortage of people ready to work at the going rate of compensation -- prompting many employers to boost pay or offer bonuses in order to staff up.
That raises the prospect of what’s known and dreaded in economics as a wage-price spiral. The idea is that higher wages spur more spending growth that strains production capacity and drives up business costs. In turn, companies raise prices and workers demand even larger pay increases to stay ahead of a rising cost of living.
Those dynamics contributed to persistently high U.S. inflation in the 1970s –- a period often invoked by those who fear a lasting wave of post-Covid inflation.
Read More: Bloomberg Economics looks at the U.S. inflation outlook
Federal Reserve officials aren’t in that camp. They acknowledge that pandemic policies like stimulus checks and enhanced unemployment benefits could push wages up, and noted last week that firms are boosting starting pay.