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Wages Grow Steadily, Defying Fed’s Hopes as it Fights Inflation
The Federal Reserve has been fighting tooth and nail against inflation. However, recent wage growth trends suggest that their efforts may not be yielding the desired results. Despite all the policies that have been put in place to counteract rising prices, wages have continued to grow steadily, defying the expectations of the Fed.
The headline inflation data is showing an increase of about 5% year over year. This rise is largely being driven by higher commodity prices, supply chain disruptions, and other temporary factors. The Fed has argued that most of the price rises will not persist into 2022 as supply chains normalize and demand shifts to other areas.
However, when it comes to wages, the situation appears to be different. Wage growth has been happening steadily for the past few months and shows no signs of slowing down. This trend is causing concern for policymakers, as they believe that it may push up inflation more than expected.
The Fed’s monetary policy is based on the Phillips Curve, which posits that a low unemployment rate typically corresponds with higher inflation. This relationship, however, has been thrown into question over the last decade. Despite historically low unemployment rates, inflation has remained stubbornly low. But what the Phillips Curve doesn’t take into account is the bargaining power of workers.
As the job market becomes more competitive and the economy continues to recover from the pandemic, workers are using their newfound bargaining power to demand higher wages. This is putting upward pressure on wages and causing inflationary pressures to mount, in contrast to traditional models that see wage growth as a lagging indicator.
The continued rise in wages has led to some fears that inflation could become more entrenched. As wages increase, firms will be forced to raise prices to maintain their profit margins, leading to a self-perpetuating cycle of higher prices and higher wages.
The Fed’s response to this wage growth has been to stick to their guns and claim that they expect inflation to moderate over time. However, the continued growth in wages suggests that their predictions may not turn out as expected.
One reason for this disconnect between policy and wage growth may be that the economy is changing in fundamental ways. For example, remote work is making it more difficult for employers to attract and retain talent. Workers are no longer tied to specific locations, so companies must offer higher wages to compete for the best workers.
Furthermore, the pandemic has led to a shift in consumer preferences towards goods and services that are less susceptible to supply chain shocks. For example, people have begun to favor local produce over imported goods, or are choosing to purchase goods that are more durable and less likely to be affected by supply chain disruptions.
As we move forward, the question remains: will the Fed’s policies be enough to keep inflation in check? Or will wages continue to grow, resulting in higher and more persistent inflation? Only time will tell, but for now, it seems that wages are defying the Fed’s hopes as they fight inflation.
