COMP NEWS – Inflation is a worldwide concern, as workers’ wages and the cost of living continue to rise rapidly. Now, the US Federal Reserve has a message for employers and employees alike: wages are growing too fast.

American workers have seen their wages climb faster than at any time since the mid-1980s. But inflation has risen so fast that workers have actually been handed a pay cut instead.

Every time inflation ticks up, it takes a bite out of workers’ pay and chews away at their bank accounts. And this current stretch of inflation — triggered by a confluence of events, including the war in Ukraine and the ongoing pandemic — has had a voracious appetite.

That has meant wage hikes have actually turned into losses, with the latest inflation report showing consumer prices shot up by 8.6% for the year ending in May. As a result, the average consumer is having to cough up an estimated $460 more every month than they did at this time last year to pay for the same goods and services, according to Moody’s Analytics. Additionally, research from the University of Michigan found that real disposable income per capita is on track to show the greatest yearly decline since 1932.

The Federal Reserve has announced that as part of its plan to tame inflation, it will also seek policies that curb wage growth, citing a concern that higher wages will continue driving inflation. But some economists say that the Federal Reserve has it backward – that material changes from supply shocks are driving up inflation, and higher wages are merely a symptom following the cause.

Making matters worse for US workers is the Federal Reserve, which has embarked on a rate-hiking campaign aimed at not only taming inflation but wage growth, too.
“When the Fed meets and makes its policy decision, most people are not getting that what the Fed is saying is ‘you are making too much money, your wages are rising too fast, and we need to slow the demand for labor, and we need to slow wage increases,'” said William Spriggs, an economics professor at Howard University in Washington, D.C., and chief economist for the AFL-CIO labor union.
But wage growth is not, to a material degree, driving inflation, said Mark Zandi, chief economist at Moody’s Analytics.
“The causality is running from inflation to wages, not from wages to inflation,” he said.
Instead, the main drivers of today’s price increases are actually a series of extreme supply shocks, including failures in the global supply chain and the war in Ukraine, Spriggs said.
The actions of the Federal Reserve regarding inflation will have enormous effects on the lives of Americans. The question is: will they get it right?
The Fed is indeed in a precarious position. As it raises rates to tame inflation, it needs to try not to push the economy into a recession.
On Wednesday, the Fed committee said in its statement it was “strongly committed to returning inflation to its 2% objective,” indicating that more aggressive hikes are not off the table.
The Fed also said it does not expect inflation to decrease this year and sees unemployment rising to 3.7% in 2022, higher than its March prediction.
“I think they’ve got a fighting chance to land the economic plane on the tarmac without crashing it,” Zandi said. “We need a little bit of luck on the pandemic and on the fallout of the Russian invasion.”

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