Bad News for the Fed As Inflation and Wages Continue to Climb Rapidly

It takes months or even years for Fed policy to have its full effect on the economy, because rate increases set off a chain reaction: As it becomes more expensive to borrow, consumer spending on big-ticket items and business investments in expansion slow down. Demand wanes, hiring slows and the labor market eventually cools off. As that happens, wage growth should also slow, further weighing on demand.

Fed officials face a major challenge as they try to gauge whether their policy changes so far will be sufficient to cool down the overheating job market, which has very low unemployment and far more job openings than workers.

While there are signs of nascent slowing — including the measure of wages and salaries in Friday’s data, and recent declines in job openings — most indicators suggest that the labor market remains unusually hot.

The fresh employment cost data “doesn’t show much slowdown just yet in strong wage growth, even if we’re seeing it in other measures,” Omair Sharif, the founder of Inflation Insights, wrote in a research note after the release.

If officials cannot bring the labor market back into balance, it could be hard to slow demand enough to constrain inflation — and allowing price increases to continue unabated for a long period is risky. Consumers could begin to expect consistently higher costs, factoring that into wage negotiations, as companies institute regular and large price increases. This shift in expectations could make fast inflation a more permanent part of the American economy.

Friday’s report underscored that for now, demand remains strong. Consumer spending rose 0.6 percent in September as Americans continued to open their wallets for cars, gifts and especially travel and other in-person experiences that many people missed out on earlier in the pandemic. Spending in September modestly exceeded forecasters’ expectations, and the government revised up its estimate for spending in August, more evidence that the Fed has not yet managed to rein in demand.

The resilience of the American consumer has been clear in recent corporate earnings calls, even as firms worry that the Fed’s rate increases will eventually weigh on shoppers. American Express, the credit card company, is looking forward to a robust holiday season as consumers shift their spending toward services.

Article source: https://www.nytimes.com/2022/10/28/business/fedeal-reserve-inflation-wages.html