Rise in Wages Seen To Increase Inflation Concerns

The August jobs report issued by the Bureau of Labor Statistics is offering new light on inflation concerns. Asides from the low hiring numbers, the report showed that wages are going higher even as actual hiring remains weak. 

RELATED: White House Revises Inflation Forecast From 2% to 4.8%

Wage Raises Are Leading To Inflation Concerns

Last August, average hourly earnings rose by 0.6%, which is around twice what economic experts anticipated. Currently, wages are 4.3% higher compared to rates last year.

Even industries that reported zero job growth such as leisure and hospitality reported wage hikes of 1.3% for the month and 10.3% for the year. 

Wall Street expects that Federal Reserve officials will recognize the writing on the wall. Business leaders hope that wage and inflation rates will influence the Fed to start acting now instead of later.

This covers making preparations to ease out the easy monetary policies in place since the pandemic started. Ultimately, it could mean higher interest rates and lower bond purchases. 

Inflation Concerns and Jobs Picture Can Lead to Pressures

Citigroup economist Andrew Hollenhorst wrote a detailed analysis of the current jobs situation.“The 5.2% unemployment rate and rapidly rising wages suggest building inflationary pressure that will ultimately lead to more hawkish policy,” he noted.

Hollenhorst also added that while Fed officials will mostly discuss total payroll gains, they might decide to shift the rhetoric. Hopefully, during the Fed’s September meeting, they might “focus on the high level of job openings and increasing wages.”

During their Jackson Hole meeting last August, Fed Chairman Jerome Powell insisted there’s little evidence that wage increases can push inflation higher. “Today we see little evidence of wage increases that might threaten excessively,” Powell said. He added that wages are “moving up at a pace that appears consistent with our longer-term inflation objective.”

Wage Growth Tracker

At present, the Federal Reserve points to supply issues as the main cause of higher inflation numbers.  Rising wage rates could mean that demand is a driver as well.

Nomura chief economist Rob Subbaraman added that “When it is difficult to disentangle demand from supply effects, price signals become more important to assess the extent of excess demand”.

In fact, some of the issues affecting the rise in inflation can subside. This applies in particular to factors that affect the current supply chains. 

Powell also noted that unit labor costs remain low despite higher wages. This might mean that companies are still spending nominally for productivity. Moody’s Analytics chief economist Mark Zandi noted the relaxed responses.

“They’re taking a lot of solace in all these other factors. Inflation is on their radar screen, but it’s not blinking red, not even yellow,” he said. Under most circumstances, many will consider rising wage numbers as a positive development.  

Easy Monetary Policy is Fueling Inflation Concerns

Some economists worry that an easy Fed policy is encouraging inflation. As a result, the easy money approach can start harming the economy instead of helping with the recovery efforts.

“It is not surprising that a combination of doubling central bank assets over the past 18 months, massive fiscal stimulus, and a skill mismatch in the labor market has resulted in inflation rising to levels not seen in decades,” wrote Komal Sri-Kumar, president of Sri-Kumar Global Strategies. “Drilling a square peg into a round hole does not solve problems. It worsens it,” he observed. 

Despite the concerns, Zandi believes Powell and the Fed will allow wages to rise for now. “It’s not like they’re dismissing this as an issue.

It’s a factor in their thinking about broader inflationary pressures. But so far, they’d say the wage growth they’re observing is more a feature than a bug,” he added.

Watch the Action Institute explanatory video that explains why higher wages are not a ‘silver lining’ of inflation:

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Do you agree that rising wages are contributing to inflation concerns? In addition, do you foresee inflation to continue rising as the US deals with higher wages and prices, supply issues, and worker shortages? Share your thoughts below.