Why rapid wage growth makes the Fed nervous
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.