Powell has publicly made the case that the pandemic, supply chain issues, war in Ukraine and volatile shifts in consumer spending trends are primarily responsible for price instability. Wages are not the cause of inflation, they’re the focus of the cure:
Federal Reserve Chairman Jerome Powell speaks during a news conference in Washington, March 22, 2023.
At the same time, influential voices on Wall Street and in Washington are arguing over whether workers’ earnings growth — which, on average, has already slowed — will need to let up further if inflation is to ease to a rate that policymakers find tolerable. Yet the arc of employee costs is still central to what economists call the “underlying inflation” rate: the level of upward price pressures that would presumably exist even without destabilizing shocks.
In 2022, Fed data showed median annual pay gains hit a peak still within the range — 3% to 7% — that prevailed from the 1980s until the 2007-09 recession, a period that included both low and high inflation. But “the world is a lot different” than it was during past inflation fights, said José Torres, a senior economist at Interactive Brokers — including the Fed’s official policy target of roughly 2% inflation, which was set in 2012.
Those were the kinds of effects seen in the early 1980s, as the Fed moved to purge double-digit inflation from the economy. By one measure meant to capture up-to-date movements in the three most recent months of data, the annual rate of wage gains has slowed to 3.6%, the lowest since March 2021, when inflation was fluttering around its tame 2010s levels. At the same time, jobless claims remain low in most sectors, as consumer spending has slowed from its surge after the pandemic reopenings but is comparable to pre-2020 trends, keeping staffing needs in place.
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