A sharp rise in wages is helping to worry about inflation

Now may be a good time for the Federal Reserve to start worrying about inflation.

August’s employment report, in addition to being a big disappointment for the number of 235,000 incumbents, also showed that even with weak hiring, wages are rising.

Average hourly earnings jumped 0.6% during the month, about double what Wall Street expected, and the increase from a year ago stood at a robust 4.3%, compared to a increase of 4% from the previous month. Even leisure and hospitality, which experienced net employment growth in August, saw a jump in wages of 1.3% per month and 10.3% in the year.

These figures come as the Fed is weighing in as it begins to withdraw from historically easy monetary policy since the early days of the Covid-19 pandemic. Some voices on Wall Street expect wages and inflation to begin to resonate among Fed officials.

“The 5.2% unemployment rate and rapidly rising wages suggest inflationary pressure that will eventually lead to a poorer policy,” Citigroup economist Andrew Hollenhorst wrote in a detailed analysis of the current employment situation.

While Fed officials mostly discuss total payroll gains, Hollenhorst said he “would expect this rhetoric to change a bit, perhaps in September. [Federal Open Market Committee] meeting, with more attention to the high level of employment and the increase in wages “.

Fed Chairman Jerome Powell made a major effort in his annual speech in August during the Jackson Hole Central Bank symposium to allay concerns about rising wage pressure and inflation in general, despite the consistently higher figures.

“Today we see little evidence of wage increases that could threaten excessive,” Powell said during the Aug. 27 speech. The measures Powell said he follows (he did not mention the Department of Labor’s average monthly earnings per hour) point to “wages rising at a rate that seems consistent with our long-term inflation target.”

One specific measure Powell mentioned was tracking Atlanta Fed wage growth.

This measure analyzes monthly and twelve-month wages, and then uses a three-month moving average to address the distortions. At a fluid level, the tracker shows wages rising at a rate of 3.7%, quite consistent with recent years. Without softening, the twelve-month rate reaches 4.2%, which is the highest since 2007 and represents the handful of data they have achieved over the years.

The Atlanta Fed will update the tracker on Friday, giving the Fed another look at possible pressures that could trigger a wage price spiral, which economists consider “bad” inflation.

So far, Fed officials have attributed a higher number of inflation to supply problems. A continued rise in wages could indicate that demand is becoming a factor.

“When it is difficult to separate demand from the effects of supply, price signals become more important in assessing the extent of excess demand,” wrote Nomura chief economist Rob Subbaraman.

By the way, there is also evidence that some of the problems that could stimulate inflation could ease, most notably some of the supply chain problems that Powell has cited.

The president also noted that unit labor costs remain low, meaning companies are still not spending substantially more on productivity, which could also slow inflation.

“They’re taking a lot of consolation on all these other factors,” said Mark Zandi, chief economist at Moody’s Analytics. “Inflation is on the radar screen, but it doesn’t flicker in red, not even in yellow.”

Wage increases in most circumstances would be considered positive.

However, gains dragged the growth of the consumer price index of 5.4% in July and only coincided with the 3.6% increase when food and energy prices were eliminated. in July, the most recent month for which data are available.

Some central bank officials and economists worry that the Fed’s easy policy will fuel inflation and start causing more damage than help. Rising house prices and high consumer inflation expectations fuel some of these fears.

“It is not surprising that a combination of doubling central bank assets over the past 18 months, a massive fiscal stimulus and a mismatch in skills in the labor market has caused inflation to rise to levels not seen in decades,” he wrote. Komal Sri-Kumar, President of Sri-Kumar Global Strategies. “Drilling a square plug into a round oil doesn’t solve problems. It makes it worse.”

Still, Zandi believes Powell and the Fed will be content to allow wages to rise for now.

“It’s not that they dismiss this as a problem. It’s a factor in their thinking about broader inflationary pressures,” he said. “But so far they would say the wage growth they are seeing is more of a feature than a mistake.”