Wage increases and inflation worries
Inflation concerns have dominated the wall of worry investors have been climbing. Federal Reserve officials have been working hard to tamp down talk of the trend of higher prices anchoring in the economy.
The focus will fall on working and wages in the week ahead with the release of the June unemployment report Friday.
Worker pay and prices tend to move together, though there are plenty of unique pressures that can influence each. Research from the St. Louis Federal Reserve Bank in 2015 found “as inflation increases, wage growth also rises.” Looking over more than 50 years of data, it also found the higher the inflation, the rate of real wage growth still increased, but at slower rates.
It has been a volatile time for wages. Pay was increasing at a 5 percent annual clip earlier this year. In May, average hourly wage growth had slowed to 2 percent annually. Companies such as Chipotle, Under Armour and Target have or are raising minimum wages.
These efforts to attract people back to the job market are not necessarily inflationary signals for investors. Higher pay is a natural consequence of the supply-demand characteristics of a job market rebounding from its pandemic-induced and shortlived depression.
Despite 12 consecutive months of gains, the U.S. job market still was 6.4 million positions short of its pre-pandemic level in May. There were 3.5 million fewer people counted as part of the labor force, too.
Bigger paychecks are only one of the incentives for people to re-enter the job market. Vaccinations,
childcare, working conditions, and career opportunities all play a role.
Teasing out the durability and sustainability of inflation from bigger paychecks is limited. Pay changes tend to be reactive to labor market forces, so they can fortify underlying inflation trends.
Because of that, investors worry that by the time wages are regularly making big gains, inflation has taken root, and the Federal Reserve may have fallen behind on its work to choke off fast rising prices.