Powell Smacks Down Argument That Higher Wages Are Fueling High Inflation

• Strong wage growth hasn’t played a big role in lifting inflation, Fed Chair Jerome Powell said Wednesday.
• Price and pay increases have boomed in recent months, raising fears of a 1970s-like inflation crisis.
• While soaring wages aren’t a problem now, they could be problematic if they don’t eventually slow, Powell said.

Conservative economists have repeatedly raised concerns in 2021 that surging wages will give way to even higher inflation.

That simply hasn’t been the case,

Federal Reserve

Chair Jerome Powell said Wednesday.

Two key ingredients of a new inflation crisis emerged in the fall. Inflation data out Friday showed prices soaring through November at the fastest one-year pace since 1982. Meanwhile, the Employment Cost Index showed wages soaring in the third quarter by the most since 2004.

The combination of red-hot inflation and massive raises sparked fears of a dreaded wage-price spiral. The phenomenon describes a 1970s-style cycle in which high inflation leads to larger pay hikes, which in turn fuel more spending and even higher inflation.

Even though the ingredients are there, the US isn’t staring down such a spiral just yet, Powell told reporters in a press conference. Wages have “risen briskly,” but the jump “has not been a major contributor” to this year’s high inflation, according to the Fed chair.

“Wages are not a big part of the high inflation story that we’re seeing,” Powell said. “We don’t see this yet, but if you had something where real wages were persistently above productivity growth, that puts upward pressure on firms and they raise prices.”