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Wages rise … but prices rise more

Mitchell Hartman Mar 31, 2022
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Wage increases aren't keeping up with inflation, but experts say it will even out soon. Justin Sullivan/Getty Images

Wages rise … but prices rise more

Mitchell Hartman Mar 31, 2022
Heard on:
Wage increases aren't keeping up with inflation, but experts say it will even out soon. Justin Sullivan/Getty Images
HTML EMBED:
COPY

March wage data comes out tomorrow. In February, average hourly earnings were up 5.1%, much higher than pre-pandemic. As high as wage inflation might be, however, it’s not outpacing price inflation right now.

This morning the Bureau of Economic Analysis reported on personal income and spending. The key figure is what’s known as the Personal Consumption Expenditures deflator, the Fed’s preferred measure of consumer inflation. February’s PCE was up 6.4% since last year, way above what the Fed wants. Another key measure, the Consumer Price Index, was up by even more in February.

When prices shoot up, people get upset if their wages don’t keep up, because their paychecks are losing ground. “That means that real incomes, inflation-adjusted incomes — what we call ‘purchasing power’ — is being squeezed,” said Gary Schlossberg, a global strategist for the Wells Fargo Investment Institute.

There’s a paradox: While wage gains strong enough to keep up with price inflation would be good for pretty much everyone in the economy, that would actually be bad for the economy itself, because it would drive even more inflation.

“A wage-price spiral obviously would be a huge concern for the Fed,” said Andrew Hunter, Senior U.S. economist at Capital Economics. When workers’ demands and expectations for wage hikes drive employers to raise prices, it causes a spiral.

Hunter said some factors driving wages are now calming down, like small-business demand for workers, and job openings. “Labor shortages tentatively starting to ease a little bit, consistent with wage growth stabilizing over the next few months,” he said.

The last time the economy fell into a damaging wage-price spiral was the 1970s and ‘80s. Nowadays, workers’ leverage to demand pay hikes and sap economic growth is small, said Wells Fargo’s Schlossberg:

“Stagflation was really more of a chronic problem in the 1970s due to strength in unions, cost-of-living agreements built into contracts really chasing inflation higher,” he said.

A pandemic-induced shortage of workers combined with soaring consumer demand has led to some robust wage hikes.

“It is very rare for employers to cut wages. Some prices can fall. I fully expect used car vehicles to not be as expensive next year as they are right now,” said Claudia Sahm, the director of macroeconomic research at the Jain Family Institute.

In time, workers’ purchasing power should gain back some of the ground that’s been lost to soaring prices. 

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