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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.”

The central bank caved to historically strong inflation during its Wednesday policy meeting. The Fed announced it would double the speed at which it shrinks its emergency asset purchases, signaling it will move faster to lift interest rates and cool price growth in 2022. Economic projections published after the meeting showed policymakers anticipating three rate hikes next year and another three in 2023.

Powell cited “inflation developments and the further improvement in the labor market” for the accelerated taper pace. Recent months have seen the unemployment rate plunge more than expected as more Americans get back to work, yet millions remain on the sidelines. The labor shortage has fueled the strong wage growth seen through 2021, and recent data suggest the trend will last well into 2022.

Should the unusual tightness in the labor market continue, it’s possible that rising pay could shift from a pandemic boon to a new source of inflation, Powell said. 

“With the kind of hot labor market readings and wages we’re seeing, it’s something that we’re watching,” he said, adding it’s “unclear” when the labor shortage will end.

For now, the Fed’s projections call for inflation to rapidly fade over the next 12 months. Median forecasts in the Wednesday release show inflation easing to 2.6% in 2022 after averaging 5.3% this year. The rate will then slow further to 2.3% in 2023, according to the estimates.

The forecasted inflation is a far cry from the levels seen during the wage-price spiral of the 1970s, and most sectors’ raises in 2021 haven’t even been enough to keep up with inflation. But as the economy continues to heal and some signs point to inflation having peaked, surging pay could be the next thing to go from transitory to persistent.

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