Strong wage increases cast doubt on the imminent disappearance of inflation

September’s wage gains further fueled the argument that the current pace of inflation could last longer than many economists expect.

Average hourly wages increased 0.6% for the month, resulting in the year-over-year increase increasing 4.6%. Over the past six months, wages have grown by an average of 6% per year.

With the exception of a brief spike in 2020, this is the fastest annual pace since the Bureau of Labor Statistics began tracking the measure in March 2007. It is also the third consecutive month that the annual increase was over 4% and comes in a context of tightening labor. market and inflation which has been more persistent than many experts had expected.

“You get the perfect recipe for secular change in inflation,” said Joseph LaVorgna, chief economist for the Americas at Natixis and former chief economist at the White House. “You are struggling to get the goods you want and restock your inventory due to supply chain disruptions. It’s the perfect storm to be careful what you want if you want higher inflation. “

Although inflation has been hovering around a 30-year high, many economists and Federal Reserve officials believe it is “transient,” the product of temporary pressures that will soon subside and bring the rate back to its peak. usual level around 2%.

However, the pressures felt in the market do not appear to be transitory.

Calego chairman David Rapps, whose company makes luggage as well as many other consumer products for large retailers, scoffed at the idea that inflation will soon subside.

“I laugh when I read very smart people in suits, especially the Fed, say it’s temporary,” Rapps said. “I don’t know the last time all of these pressures occurred at the same time in the consumer products market.”

He said this has forced his company to make adjustments along supply chains and at scale to ensure it can keep pace.

“We have to be as nimble as possible,” Rapps said. “We only have to figure out on the container side how to get containers in the first place and, second, how to get them at the most competitive prices. “

Persistent price increases have multiple ramifications.

At the most basic level, they raise questions about how long money-intensive consumers will maintain a rapid spending pace that saw retail sales rise 0.7% in August, although economists believed that consumer purchases would decrease.

But it is also important at the political level.

The Fed is considering withdrawing some of the extraordinary economic aid it provided during the pandemic, and September’s small non-farm payroll increase could otherwise serve as a deterrent.

“The report was certainly good enough to kick start the tapering,” said LaVorgna, using the market term for a reduction in the Fed’s monthly bond purchases. “There is no reason for the Fed to wait.”

Other economists share the feeling that the central bank can move forward and start slowly easing its purchases, which are now set at a minimum of $ 120 billion per month. Fed officials have indicated they could start cutting back in December and complete the asset purchase program by mid-2022.

While wage bill growth has slowed over the past two months, inflationary pressures via wages and prices are enough to convince many economists that the economy no longer needs so much help.

“Overall, the most important point to remember in terms of the economic outlook is the growing inflationary pressure evident in the [September jobs] report, “wrote Citigroup economist Andrew Hollenhorst.” Companies pay higher wages and extend working hours as they respond to labor shortages.

Salaries are clearly on the rise, especially in some of the sectors hardest hit by the pandemic.

The leisure and hospitality industries saw their wages increase by about 0.5% per month, pushing the industry up by about 10.8% from a year ago. Retail wages increased 0.7% in September and 6.2% compared to the same period in 2020.

“The upward pressure on wages will almost certainly persist for some time – a detriment to employers and another source of inflationary pressure, but also a factor that should support consumer spending over the next few months,” wrote Jim Baird, Financial Advisor to Plante Moran.

This in turn should keep the Fed on its cut schedule – an announcement in November, with cuts likely to begin in December.