(Bloomberg) -- Federal Reserve officials from opposite ends of the policy spectrum are finding some common ground in a key topic of interest-rate debates: They’re skeptical wage gains will fuel further inflation.
While Chair Jerome Powell has spoken of the risk of rapid pay gains feeding into prices, Fed presidents Austan Goolsbee of Chicago — who’s taken a dovish stance in recent weeks — and leading hawk James Bullard of St. Louis have played down their significance to the price outlook.
The divergences may play a role in policy in coming months, as officials balance their desire to bring inflation to heel against an expected softening of the labor market on the back of tighter credit.
The Fed is expected to raise rates another quarter percentage point at their next meeting May 2-3, but some central bankers might be less inclined to push ahead with tighter credit afterward even amid elevated wage gains.
Coupled with mixed data and anecdotal evidence on pay, the debate puts the spotlight on the Labor Department’s Friday release of the quarterly employment cost index – considered by Fed officials to be the gold standard for measuring labor compensation.
Bloomberg Economics analyst Jonathan Church forecasts the index rose 1.2% in the first quarter, up from 1% in the final three months of 2022, driven by minimum wage increases in several states and catch-up pay increases to reflect the rise in inflation.
The Fed’s favorite inflation gage, the personal consumption expenditures price index, grew at an 4.2% annualized pace in the first quarter, up from 3.7% in the final three months of 2022, government data released today showed.
In an April 19 interview on NPR’s Marketplace radio program, Goolsbee argued against focusing too much on pay.
“The thing that I think too many people look at is wages,” he said. “The data show that wages are not a leading indicator of prices. They actually lag prices.”
Goolsbee sought to soft-pedal his differences with Powell, voicing admiration for the chair’s way of thinking and saying that there’s no doubt that wage growth and price growth are tied together. It’s just a question of which leads the other.
In pushing for higher rates over the past year, Bullard has consistently played down the role of the labor market in fueling inflation.
He instead has stressed the importance of inflation expectations and has posited a scenario in which companies scale back price increases as they come to recognize that they’ll lose customers if they don’t.
There’s a flavor of that happening in the fledging market for electric vehicles, where Tesla Inc. has repeatedly cut prices to lure reluctant buyers.
The debate over wages is taking place amid uncertainty over just where they’re headed after their growth topped out last year. “There’s a little bit of a fog around the data,” Harvard University professor and former White House chief economist Jason Furman said.
Pay growth has continued to moderate this year, as measured by monthly readings on average hourly earnings from the Labor Department.
Anecdotal evidence also seems to point to a downshift.
Wage growth slowed in most of the country in the past few months, according to the Fed’s latest Beige Book report, which gathers information about the economy from businesses across the US. Firms reported a moderate cooling in labor markets compared with last year, when a shortage of workers pressured employers to increase pay and benefits.
That jibes with what Richard Wahlquist, president of the American Staffing Association, is hearing. “The escalation of wages that we saw in 2021 and throughout 2022 has certainly been tempered,” said Wahlquist, whose association represents 1,700 staffing and recruiting agencies.
But former Fed official Riccardo Trezzi doubts wages are decelerating much. He argues that the average hourly earnings figures have been biased downward by seasonal-adjustment issues and changes in the mix of workers being hired.
What’s more, the wage tracker compiled by the Federal Reserve Bank of Atlanta shows salaries climbing at a faster pace in March after steady growth in the prior three months.
The mixed picture prompted JPMorgan Chase & Co. economist Murat Tasci to call Friday’s release of the employment cost index a “much-needed additional signal about the state of wage inflation a year into the Fed’s tightening cycle.”
(Adds price data in seventh paragraph)
©2023 Bloomberg L.P.
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