Worker pay isn’t keeping up with inflation
For all the hype that wage growth has received this year, pay isn’t keeping up with price growth. Real earnings, or wage growth less inflation, turned sharply negative the last two months, after eeking out gains over the summer, consumer price data out Friday show.
Why it matters: That’s an erosion of spending power, which is a bummer. But for the time being, it takes the edge off worries of a wage-price spiral, which happens when higher wages fuel inflation, which fuels the need for even higher wages — and so on.
- The most recent data, of course, doesn’t tell us where we're headed. “But you can try to extrapolate based on trends … and it seems like this fear of a wage-price spiral might not play out if wages aren't actually keeping up with inflation,” Megan Greene, chief economist at the Kroll Institute and senior fellow at Harvard Kennedy School, tells Axios.
The big picture: Wage growth and price inflation are closely intertwined, but like the proverbial chicken and egg, experts have different views on what causes what.
- Up to a certain point, wage growth is generally viewed as a good thing, especially when it flows to workers on the lower end of the income spectrum.
- But corporate leaders and investors often view strong wage growth as a risk to company profits and, in times like this, a driver of inflation.
- “It’s hard to know what’s leading and what’s lagging in that scenario,” Yung-Yu Ma, chief investment strategist at BMO Wealth Management, tells Axios.
The bottom line: A seemingly tight labor market means workers have power to demand pay increases — and there’s no reason they shouldn’t try to grab their piece of the pie.
- If wages make gains in keeping up with inflation, we'll probably argue about the chicken and egg regardless.
Go deeper: Inflation hits highest level in 40 years