Why rapid wage growth makes the Fed nervous
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The startlingly rapid pace of job creation in January captured all the headlines Friday. But other details contain the biggest implications for markets in the months ahead: namely, wage growth.
Why it matters: Wages soared last month, great news for workers seeking bigger raises that help keep up with inflation. But that could fuel higher inflation in the future and prompt a more aggressive response from the Federal Reserve.
- Average hourly earnings were up 0.7% in January and 5.7% over the last year.
The striking thing about the latest report is how it shows wage increases accelerating, not leveling off or receding.
- Over the three months ended in January, average hourly earnings rose at a 6.9% annual rate — and that rolling average has risen in each of the last four months.
- Among nonsupervisory workers, that number is 7.8%, the highest since 1981 except for an unusual period early in the pandemic when figures were distorted.
The big picture: For now, workers are still playing catch-up to high inflation — analysts expect the Consumer Price Index that'll be released Thursday to show a 7.3% rise in prices in the year ended in January.
- But the flip side of workers catching up will be continuing cost pressures facing businesses in 2022, especially in labor-intensive industries.
Moreover, if pay keeps rising at ever-faster rates, there's a greater risk of an outright wage-price spiral — the thing central bankers hope to avoid.
- The main tool Fed chair Jerome Powell and his colleagues have to try to stop that from happening is raising rates more, faster.
- That explains both why Treasury yields rose sharply Friday, and why futures market odds that the Fed raises interest rates by 0.5% at its March meeting — instead of a mere quarter-point — rose to 37% from 14% on Friday.
One of Powell's counterparts overseas is using a more direct approach to try to rein in wage growth: Urging his citizenry to restrain themselves in seeking higher pay.
- Bank of England governor Andrew Bailey, in a BBC interview, said "I’m not saying nobody gets a pay rise, don’t get me wrong, but I think, what I am saying, is we do need to see restraint in pay bargaining, otherwise it will get out of control."
- Given the immense political and press pushback that Bailey received for those comments, Powell and company may want to think twice about talking down wages.
The bottom line: Workers need raises just to keep up with higher prices — but the faster they get them, the more likely central banks are to become fearful that high inflation has gotten entrenched.
