In welcome sign for Fed, wage growth appears to be peaking
U.S. wage growth looks to be peaking, a heartening development for the Federal Reserve if not for American workers.
After handing out hefty salary increases over the past year, companies are now becoming more cautious with their cash over concern further big payouts will eat into profits, according to staffing companies, business owners and recent surveys. Economists are penciling in a moderation in annual earnings growth to 5.2% in May from April’s 5.5%. Those figures are among the highest dating back to 2007.
Employers have had success passing on higher labor costs to customers so far, but may be reaching a tipping point at which higher price depress demand. That’s exactly what the Fed is hoping for in its all-out mission to tame some of the worst inflation in 40 years.
Chair Jerome Powell has zeroed in on the tight job market as a possible source of the problem, so any cooling in wage growth — and therefore, potentially inflation — would be welcome news for the central bank, as it walks a tightrope to rein in price pressures without sinking the economy.
“We’ve reached a level of wage inflation where employers are going to say, ‘I’ve done as much as I can,’” said Jonas Prising, chief executive officer of Manpowergroup Inc. “‘My consumers and customers aren’t going to accept me passing these costs on any further.’”
That mindset should encourage Fed policy makers, who are counting on what they see as anchored inflation expectations to keep price pressures in check. Their biggest fear is that expectations become unhinged, leading to a 1970s style wage-price spiral in which consumers anticipating higher prices will, in turn, demand higher wages — forcing companies to charge their customers more.