Inflation in the U.S. was already running at the fastest pace in 30 years. Now rapidly rising wages are adding to the upward pressure on prices.
Hourly pay for the average worker rose sharply again in September, pushing the increase over the past year up to 4.6%. Businesses are paying more because of a huge shortage of labor that’s hampering their growth.
Before the pandemic wages had been rising at a smaller 2.5% to 3% pace.
The current rate of wage growth is the fastest since the late 1970s and early 1980s, when high inflation drove up worker pay.
While the increase in pay is great news for workers, a rising cost of living is eating up most of their wage gains, just like it did some 40 years ago.
The prices Americans pay for goods and services have jumped 5.3% over the past year using the better known consumer price index. And prices are up 4.3% in the last 12 months using the Fed’s preferred inflation gauge.
The rate of inflation was rising less than 2% before the onset of the coronavirus pandemic, enabling workers to eke out a small increase in inflation-adjusted pay.
The broad increase in U.S. inflation is not largely the result of higher wages, though. The chief source is a shortage of keys parts and supplies that businesses need to produce goods and services.
These shortages are expected to persist well into next year because of disruptions in global supply chains caused by business lockdowns during the pandemic. Companies have to pay extra to get the supplies they need, assuming they can get them at all.
The increase in wages is an also an offshoot of the pandemic, but in a different way. Millions of Americans who had jobs before the viral outbreak still haven’t returned to work, even with the expiration last month of extra federal benefits for the unemployed.
Many are still worried about the coronavirus. Some can rely on the income of spouses. Others have had to take care of children while schools were shut. And up to several million older workers retired early and might never return.
“Job growth has slowed from its very rapid pace earlier in the summer due to an increase in coronavirus cases and difficulties in hiring,” said chief economist Gus Faucher of PNC Financial Services.
Making it worse has been a huge explosion in pent-up demand as consumers spent government aid money, or savings accumulated when entertainment venues were closed, once the economy fully reopened this year. The demand has overwhelmed many businesses and they can’t keep up.
These issues are unlikely to be resolved soon, potentially robbing the U.S. economy of momentum and prolonging how long it takes to make a full recovery.
The Federal Reserve predicts inflation will eventually slow to its 2% target, but senior officials finally acknowledged recently the current bout of high inflation is likely to last at least until the middle of next year.
Not everyone is convinced.
“The tight labor market likely will create more persistent inflation than Fed officials expect,” economists at Citi Research said in a note to clients.