Strong inflation and wage growth remain robust into late 2021, setting the stage for a challenging economic year in which the Federal Reserve and the White House will try to maintain momentum in the markets. employment while controlling for price increases.
The personal consumption expenditures index, the Fed’s preferred inflation gauge, hit 5.8 percent in December, up from 5.7 percent the previous month. That pace surpassed last month to become the fastest since 1982.
Inflation is being adjusted somewhat on a monthly basis, but its still high annual readings come at a time when wages are rising rapidly. While strong wage growth is good news for workers, it also raises the risk of persistently high inflation: Companies may raise prices to try to cover rising labor costs.
The Cost of Employment Index, a pay and benefits gauge closely watched by the Fed, increased 1% in the final quarter of 2021 from the previous year. While that gain was less than the 1.2% economists in a Bloomberg survey had forecast, it capped a year of strong gains: 4 percent increase for the year through the end of the fourth quarter, with the company’s salaries and wages increasing by 4.5%.
That marks the fastest growth rates for both overall wages and salaries and wages since the data series began two decades ago.
“Overall wage growth, on a nominal basis, is still quite strong,” said Omair Sharif, founder of Inflation Insights, referring to the data before they are adjusted for inflation. “The downside is that inflation is eating away at all of these nominal returns.”
The price hike is also denting consumer confidence, making inflation a political liability for the Biden administration and Democrats in the midterm election year. While the White House has Take steps In order to relieve the pressure on strangled supply chains, the job of slowing demand to bring prices under control lies mainly with the Fed.
Fed policymakers have signaled that they will likely start raising rates at their March meeting as they try to prevent the current rapid price hike from becoming a more permanent feature of the economic landscape. economic. Markets are anxiously watching the Fed’s next steps, trying to gauge how much and at what pace the Fed will raise rates. Higher borrowing costs could slow economic growth and lower stock prices, taking away some of the momentum in the US expansion.
Understanding inflation in the US
Economists expect inflation to taper this year, though tangled supply chains make it difficult to gauge when that will happen. The world’s trading system is still under marked strain, based on a variety of measures – including a produced by the Federal Reserve Bank of New York Combination of backlog, delivery time and inventory.
Inflation accelerated last year as people bought more goods, helped by repeated checks of government relief and other federal benefits. Factories and shipping lines around the world have struggled to keep up with demand, leading to rising prices for cars, lumber and clothing. Although spending has been moderated a bit lately – it fall in december as Omicron spreads, as commodity consumption declines – it’s not yet clear if that’s the bright spot caused by the pandemic or by the protracted setback.
Fed officials have been watching for signs that inflation, which they predict will fall below 3% by year-end, may instead persist.
Jerome H. Powell, Fed Chair, said: “We pay close attention to the risks that persistent real wage growth outpacing productivity could put upward pressure on inflation. said in a press conference on Wednesday. Friday’s data may provide officials with some mild regret.
In December, Mr. Powell specifically cited the previous Employment Cost Index reading – which hit a high in the third quarter – as one reason the Fed decided to shift from stimulating growth to preparing against if prolonged inflation.
The fact that the measure did not spike as expected in the final quarter of the year may give investors confidence that the central bank’s policymaking team, the Federal Open Market Committee, will not accelerate the economic withdrawal plan. Help.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote after the news release: “Given the rising level of labor participation and measures of declining demand in recent months, it makes sense. to think wage growth is unlikely to re-accelerate significantly. “In the meantime, this report eases immediate pressure on the FOMC to act aggressively.”
As inflation uncertainty persists and another wave of the virus prevents a return to normalcy, several measures of consumer confidence suggest that people are becoming less optimistic. more important. The University of Michigan survey showed a faltering sentiment as prices rose, and Conference Board index tick in January.
Frequently asked questions about inflation
What is inflation? Inflation is a Loss of purchasing power over time, which means your dollar won’t go as far tomorrow as it did today. It is usually expressed as an annual change in prices for everyday goods and services such as food, furniture, clothing, transportation, and toys.
“You have very high inflation, so people are seeing their purchasing power erode,” said Dana M. Peterson, chief economist at The Conference Board. The Conference Board, said the cause was a resurgent virus. “People will have more confidence as we move beyond Omicron.”
Right now, it’s a time of economic uncertainty.
Ashley Fahr, owner of food and event space company La Cuisine in Venice, California, says rising grocery costs are starting to fall at a tough time – right before Omicron starts to rise, get people to withdraw from activities like cooking classes and the dining events she offers.
In December, she noticed that her food bill grew about 15%, fell at the profit margin, and passed about 5% of it on to customers while absorbing the rest of the increase.
“I don’t want to quote a number where people would falter,” she said.
Ms. Fahr said she pays her workers – most of them independent contractors – competitive wages and it is difficult to keep up with rising prices and still be profitable. She’s watching to see what other local food service providers and cooking classes do with their prices — and if they begin to pass the full increase on to customers.
“If other people do it, I will do it too,” Ms. Fahr said.
That kind of logic is what economic officials worry about. If businesses and consumers begin to expect prices to rise steadily, they may begin to accept them instead of resisting them – and as inflation becomes an expectation, it can increase year-on-year. economists worry.
“What we’re trying to do is raise inflation, keep inflation expectations at 2%,” said Powell, the Fed chair, at a press conference this week. “That’s always the end goal.”
https://www.nytimes.com/2022/01/28/business/pce-inflation-federal-reserve.html Wages grow at fastest pace since 2002 as inflation continues to heat up