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Column: Spiraling Wage Price Alarm May Prolong Real Income Funk: McGeever

ORLANDO, Fla., April 8 (Reuters) – Fear of a 1970s-style price-wage spiral is being used by central banks to tighten monetary policy – but by slowing economies now they could just be exaggerating the harm long-term fall in real incomes.

For decades, policymakers have used worry about wage growth chasing inflation, thereby pushing prices up in a self-perpetuating loop, as reason to preemptively slow economic activity and stifle periodic bouts of inflation quickly.

Amid the wild economic swings around the pandemic, the US Federal Reserve – which only recently changed tack to acknowledge that it may have been too hasty in past tightening – decided to look through the rebound inflation for a while. Now he is scrambling to catch up, as inflation rates have not come down and worries about corresponding wage increases are resurfacing.

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Minutes from the March meeting of the Federal Reserve’s Open Market Committee released this week showed policymakers see “substantial” wage increases fueling higher prices and fear that wage pressures will build. spread and only stay “high”. Read more

The overwhelming consensus on Wall Street is that the Fed must – and will – raise interest rates aggressively. Some indicators, like the unemployment rate of 3.6% and the high ratio of jobs to job seekers, support Fed Chairman Jerome Powell’s assertion that the labor market is “extremely tense” and potentially inflationary.

But many influential economists believe that stabilizing real wages just by weakening the economy will only exaggerate the problem.

Real earnings growth is negative. The latest annual consumer price inflation and nominal wage growth rates are 7.9% and 5.8%, respectively, although inflation is expected to ease later this year.

In real terms, average weekly earnings in February were where they were in 1974 and were lower than in the same month last year, according to data from the Bureau of Labor Statistics.

Robert Reich, a professor at the University of California at Berkeley and former Secretary of Labor in the Clinton administration, argues that it is “misleading” to suggest that the labor market is tight.

“There is no wage and price inflation. With all due respect, I don’t know what world he (Powell) lives in,” Reich told Reuters, adding: “Anyone who thinks that companies cannot afford to pay their workers more without raising prices cannot make basic calculations.”

Reich notes that corporate profits are the highest since the 1950s, companies are passing on rising costs to customers, and share buybacks are at record highs. If the labor market were really tight, a large part of this flow would surely go to workers.

Despite recent high-profile cases of worker mobilization at Amazon.com Inc (AMZN.O) and Starbucks Corp (SBUX.O), the fact remains that barely 6% of workers in the US private sector are unionized . This is down from 25% in the 1970s and 20% in the early 1980s.

At the global level, collective bargaining power has never been weaker.



The employers are not yet manning the barricades.

A survey released in February by Payscale, an online pay, benefits and compensation information firm, showed that 44% of companies planned to give pay rises of more than 3% this year.

This is higher than in previous years, but annual consumer price inflation at the time of the survey was 7% and now stands at almost 8%. Significantly, the share of companies planning to grant wage increases of 5% or more was lower than in 2016, 2017 and 2021.

A January survey of 1,004 U.S. companies by Willis Towers Watson showed that companies expected average wage growth of 3.4% this year. Again, this is up from recent years, but still well below inflation.

It’s hard to imagine those wage hikes being revised upwards as the Fed prepares to tighten monetary policy at the fastest rate since 1994, which will slow the economy, possibly into recession. .

David Blanchflower, an economics professor at Dartmouth College and a former Bank of England policymaker, says raising rates in this environment is a mistake and will “kill” early signs of nominal wage growth after decades of decline in real wages.

“Is this inflation driven by demand? No. It is not inflation driven by wage growth. There is no evidence that companies are raising prices because of rising wages,” did he declare.


It is crucial for the markets. Steve Major, global head of rates strategy at HSBC, fell well below the Wall Street consensus in his outlook for US bond rates and yields. One thing that will change its “lower for longer” view is sustained wage growth.

Joseph Briggs, an economist at Goldman Sachs, wrote this week that a “substantial” economic slowdown is needed to bring wage growth back to an “acceptable pace” of 4% to 4.5%, a level in line with forecasts for Fed inflation of around 2%-2.5% for 2023 and 2024.

But that would require another 75 basis point monetary tightening not yet priced into markets, he said, raising the risk of a hard landing for the economy.

If Reich and Blanchflower are correct, increasing the risk of recession will not put upward pressure on wages.

Associated columns:

— “Japanification” still lurks behind Fed hawkish frenzy: McGeever (Reuters, March 29) read more

– Western economies on brink of recession as Russia sanctions escalate: Kemp (Reuters, March 8) read more

– ‘Terminal inflation’ jostles with ‘terminal rate’: Mike Dolan (Reuters, March 4) read more

(Views expressed here are those of the author, columnist for Reuters)

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By Jamie McGeever in Orlando, Florida. Editing by Matthew Lewis

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.