Wage Growth Is Great. The Long-Term Inflation It Creates Isn’t.
Rapid increases in worker incomes are less likely to be temporary than other peculiarities of the pandemic, raising pressure on the Fed to respond.
Demand for workers is driving big pay increases. That’s not all good.
Photographer: Joe Raedle/Getty Images
Inflation debates have been dominated by fallout from the pandemic and economic reopening, most of which has been viewed as transitory: lumber and used car prices in the first half of the year, the cost of ocean freight more recently. Rising housing rents are now expected to flow into the inflation data as well. But the most underappreciated inflation risk is wage growth.
Even with the disappointing number of jobs added in last week's report, worker incomes continued to rise quickly in September, and those increases are more likely to persist. We shouldn't expect inflation to return to 2% until either job growth or wage growth slows down.