Wage Increases Amid High Inflation
Authored by Trinity Johnson
David Harrison from the Wall Street Journal reports on the stark increase in U.S. prices and wages alike. It’s no secret that inflation has been steadily increasing for the past year. After the economy opened back up, supply stayed static while pent up demand was released. The result was rapid inflation that can be observed in nearly every accredited price index. For example, the Fed’s personal-consumption-expenditures price index rose 4.4 points in September from last year. Consumer confidence, measured by the University of Michigan Consumer Sentiment Index, has remained below the normalized value of 100 since March 2020. This summer, the index hung in the 80’s. In September and October, the index remained around 72, indicating that consumer confidence is still on the decline. The employment-cost index, which includes wages and benefits, rose 1.3% from the second quarter to the third according to data from the Labor Department. The Fed is stuck in a difficult position. If they continue to stimulate the economy with benefits, inflation may continue to surge. If the government pulls back benefits, many analysts worry that it could frustrate economic recovery and push the U.S. back into a recession.
Data from the U.S. Bureau of Economic Analysis shows that wages are increasing. The BEA’s measure of gross domestic income shows an increase in wages these past few months at the highest rate in decades. The centered moving average of this increase for the end of 2020 and beginning of 2021 is 2.64%. For comparison, the average percent change in gross domestic income is 0.95% since 2000. This increase is mostly due to government benefits.
Gross Domestic Income: Three Quarter Centered Moving Average
Percent, Quarterly, Adjusted for Seasonality
As the Fed debates scaling back government benefits even more, this indicator could be rather worrisome for the economy. Additionally, the increase in wages is partially because of the lower labor participation rate. “About 62% of American adults are either working or looking for work, the lowest rate since the 1970s” (WSJ). Higher wages may be offset when the labor participation rate begins to rise again. Without proper reform, this increase in wages will likely level out. Economic recovery could be jeopardized if inflation continues to rise sharply and if wage increases start to slow down. The Fed has many things to consider during its next meeting, particularly when to begin raising interest rates. Expectations are that the Fed will fight the trend of higher prices by beginning to raise interest rates next year, about six months sooner than the last Federal Reserve forecast, according to market experts.