Fed to Continue Fight Against Inflation Next Year... 'Wage Growth' Becomes Key Factor

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), who warned that the fight against inflation is not over, is expected to place 'wage growth' at the core of next year's monetary policy stance. Since high wages, combined with an overheated labor market, could further fuel service price pressures, it is anticipated that employment reports will receive more attention than inflation reports going forward.

On the 18th (local time), Bloomberg News cited Powell's recent remarks, reporting that the Fed has found a 'new North Star' to guide its fight against inflation. Reviewing his recent official statements reveals Powell's concerns about the overheated labor market and persistently high wage growth. Bloomberg stated, "In the early stages of the pandemic, inflation was mainly seen in goods, but now wages play a significant role in services," adding, "The core of U.S. monetary policy next year will be the wages of Americans."

At a press conference following the December Federal Open Market Committee (FOMC) meeting last week, Powell warned that "service price inflation (unlike goods prices) will not decline quickly," expressing caution that wage-driven inflationary pressures remain high. He believes that the current average wage increase of 5-6% must fall below 3.5% for the Fed to achieve its 2% inflation stabilization target. Earlier, in a speech at the Brookings Institution, Powell also pointed out that "wage growth is still at a level too high to control inflation."

In the November employment report released earlier this month, average hourly wages rose 5.1% year-over-year. In the same month, ADP reported a 7.6% increase in private sector wages. Particularly, the overheated labor market and labor shortages are factors that further drive these wage increases. Higher wages inevitably exert upward pressure not only on service prices but on overall inflation. Christopher Harvey, Head of Equity Strategy at investment bank Wells Fargo, said, "The importance of the labor market in determining the Fed's monetary policy stance has increased after the December FOMC," and assessed that "next year, the Consumer Price Index (CPI) will take a backseat to employment reports."

Concerns about the so-called 'wage-price spiral,' where wage increases lead to higher inflation, persist. However, both Treasury Secretary Janet Yellen and officials within the Fed currently judge that there are no signs of such a spiral. Loretta Mester, President of the Cleveland Federal Reserve Bank, recently stated in an interview that "wage growth is pushing up service prices," but also assessed that "there are no signs of a wage-price spiral that would fuel inflation like in the 1970s."

On the other hand, there are counterarguments that the recent wage growth trend should not be interpreted solely as an inflation factor. According to recent research by economists including David Autor, U.S. wage increases are largely attributed to structural reorganization in the labor market, such as workers moving to more productive firms.

This content was produced with the assistance of AI translation services.