Robust wage will increase solid doubt that inflation will go away anytime quickly
September wage increases have given more impetus to the argument that the current rate of inflation may last longer than many economists anticipate.
The average hourly wage increased by 0.6% per month, which corresponds to an increase of 4.6% compared to the previous year. Over the past six months, wages have increased an average of 6% a year.
Aside from a brief spike in 2020, this is the fastest annual pace since the Bureau of Labor Statistics started tracking the measure in March 2007. It is also the third consecutive month that the annual increase is more than 4% and amid a tightening of the labor market and inflation rate that has been more stubborn than many experts expected.
“You’re getting the perfect recipe for a secular shift in inflation,” said Joseph LaVorgna, Natixis chief economist and former White House chief economist. “You are having a hard time getting the goods you want and replenishing your inventory due to supply chain disruptions. It is the perfect storm to be careful what you want when you want higher inflation.”
Although inflation hits a 30-year high, many economists and Federal Reserve officials believe it is “temporary,” the product of temporary pressures that will soon subside and return the rate to normal levels of around 2%.
However, the pressure felt in the market doesn’t feel temporary.
Calego President David Rapps, whose company makes luggage and several other consumer goods for large retailers, scoffed at the idea that inflation will soon ease.
“I laugh when I read that very smart people in suits, especially the Fed, say it’s only temporary,” Rapps said. “I don’t know when was the last time you had all this pressure in the consumer goods market at once.”
He said it has forced his company to make adjustments along the supply chain lines and scale to ensure it can keep up.
“We have to be as nimble as possible,” said Rapps. “We just have to find out on the container front how to get containers first and second at the most competitive prices.”
The ongoing price increases have several effects.
Effects on Consumers and the Fed
At the most basic level, they raise the question of how long will consumers with cash maintain the high spending pace, where retail sales rose 0.7% in August, despite economists’ assumption that consumer purchases would decline.
But it is also important on a political level.
The Fed is considering withdrawing some of the exceptional economic aid it provided during the pandemic, and the meager pay rise of 194,000 outside of agriculture in September could otherwise act as a deterrent.
“The report was certainly good enough to initiate a tapering,” said LaVorgna, using the market conditions to reduce the Fed’s monthly bond purchases. “There is no reason for the Fed to wait.”
Other economists share the view that the central bank can gently scale back its purchases, which are now set at at least $ 120 billion a month. Fed officials have indicated they could start throttling in December and complete the asset purchase program by mid-2022.
While wage growth has slowed in the past two months, inflationary pressures from wages and prices are enough to convince many economists that the economy doesn’t need as much help.
“Overall, the most important takeaway for the economic outlook is mounting inflationary pressures in the [September jobs] Report, “wrote Citigroup economist Andrew Hollenhorst.” Firms pay higher wages and work longer hours as they respond to labor shortages. “
Wages are rising significantly, particularly in some of the sectors hardest hit by the pandemic.
In the leisure and hospitality industry, wages rose by around 0.5% per month, representing an increase in the industry of around 10.8% over the previous year. Retail wages rose 0.7% in September and 6.2% over the same period in 2020.
“Upward pressure on wages will almost certainly continue for some time – a disadvantage for employers and another source of inflationary pressures, but also a factor that should support consumer spending in the coming months,” wrote Jim Baird, Financial Advisors of Was planning Moran.
This, in turn, should keep the Fed on schedule for the throttling – an announcement in November, with the reductions likely to begin in December.
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