Fed will struggle to fight skyrocketing inflation as labor shortage increases wages

The US unemployment rate was near 50-year lows at 3.6% in March, and economists expect it to hit 3.5% for April in the jobs report due out on Friday

A red-hot labor market will likely hamper the Federal Reserve’s efforts to crack down on inflation, with job openings at a record high and employers jacking up wages to attract scarce workers.

The Fed on Wednesday raised benchmark interest rates by half a percentage point, the biggest single hike in 22 years, in a move to combat inflation, which hit 8.5 percent in March from a year ago.

But with wages soaring amid a labor shortage, the monthly jobs report on Friday will be closely watched, and economists expect it to show an April unemployment rate of 3.5 percent, matching the 50-year low set just before the pandemic struck.

‘Employers are having difficulties filling job openings, and wages are rising at the fastest pace in many years,’ Fed Chair Jerome Powell acknowledged at a press conference this week. ‘Wages are moving up, and at rates that haven’t been seen in quite a long time.’

The US unemployment rate was near 50-year lows at 3.6% in March, and economists expect it to hit 3.5% for April in the jobs report due out on Friday

The US unemployment rate was near 50-year lows at 3.6% in March, and economists expect it to hit 3.5% for April in the jobs report due out on Friday

Rising wages could fuel further inflation, after the consumer price index rose 8.5% in March

Rising wages could fuel further inflation, after the consumer price index rose 8.5% in March

Fed Chair Jerome Powell acknowledged at a press conference this week: 'Wages are moving up, and at rates that haven't been seen in quite a long time'

Fed Chair Jerome Powell acknowledged at a press conference this week: ‘Wages are moving up, and at rates that haven’t been seen in quite a long time’

While rising wages are usually a boon to workers, they can be a double-edged sword if they force companies to make swift price increases for the goods and services they sell.

And indeed, the average wage gains seen by American workers in the past year have been more than erased by the high inflation rate, leaving them worse off than they were before.

Ahead of the key jobs report on Friday, there are signs that the labor market is approaching its tightest level in decades, signaling higher wages that will fuel inflation.

Employers have added an average of more than 540,000 jobs a month for the past year, pushing the unemployment rate down to 3.6 percent in March.

Although the Labor Department said Thursday that jobless claims rose by 19,000 to 200,000 for the week ending April 30, the total number of people collecting jobless aid is at its lowest level in more than 50 years.

The total number of Americans collecting jobless benefits for the week ending April 23 fell by 19,000 from the previous week, to 1,384,000. That’s the fewest since January 17, 1970.

Another report on Tuesday showed that job openings rose by 205,000 to 11.5 million on the last day of March, meaning that there are now nearly twice as many job openings in the country as there are unemployed people.

Job openings, a measure of labor demand, rose by 205,000 to 11.5 million on the last day of March, the highest level on record

Job openings, a measure of labor demand, rose by 205,000 to 11.5 million on the last day of March, the highest level on record

With abundant opportunities, the number of people quitting their jobs rose to 4.5 million in March, the most resignations in a month since records began in 2000

With abundant opportunities, the number of people quitting their jobs rose to 4.5 million in March, the most resignations in a month since records began in 2000

It was the largest number of job openings since records began in 2000, and the number of people quitting work also soared to a record high, with 4.5 million resigning from their jobs.

The vast majority of people quitting left for jobs with better pay or conditions, suggesting that employers are now in a fierce bidding war for workers.

Another report on Wednesday showed that US private payrolls increased less than expected in April, likely restrained by persistent worker shortages.

Private payrolls rose by 247,000 jobs last month, the ADP National Employment Report showed, well below the 395,000 increase that economist polled by Reuters had expected.

ADP’s chief economist Nela Richardson said the survey’s undershoot was not a sign that jobs weren’t available, but rather of a shortage of workers.

‘While hiring demand remains strong, labor supply shortages caused job gains to soften for both goods producers and services providers,’ she said.

‘As the labor market tightens, small companies, with fewer than 50 employees, struggle with competition for wages amid increased costs.’

Employers have added an average of more than 540,000 jobs a month for the past year, pushing the unemployment rate down to 3.6 percent in March

Employers have added an average of more than 540,000 jobs a month for the past year, pushing the unemployment rate down to 3.6 percent in March

With all signs pointing toward an ultra-tight labor market, concerns have mounted that the country could enter a so-called ‘wage-price’ spiral.

The wage-price spiral, which was partly responsible for double-digit inflation in the 1970s, occurs when workers expect prices to increase rapidly, and demand higher wages to compensate.

Employers, forced to pay higher wages, raise their prices to compensate, creating a self-reinforcing cycle that is difficult to break.

At Wednesday’s press conference, Fed Chair Powell tried to downplay fears of a wage-price spiral, saying that higher wages would attract more workers into the job market and ease the labor shortage.

‘We like to think that supply and demand will come back into balance and that, therefore, wage inflation will moderate to still high levels of wage increases, but ones that are more consistent with 2 percent inflation. That’s our expectation,’ said Powell.

‘We don’t see a wage-price spiral,’ I added. ‘We can’t allow a wage-price spiral to happen, and we can’t allow inflation expectations to become unanchored. It’s just something that we can’t allow to happen.’

The Fed took action against inflation by raising rates this week, but some analysts fear the central bank has moved to slowly fight rising prices, which Powell long insisted were ‘transitory’.

At the end of its May meeting on Wednesday, the Fed raised benchmark interest rates by half of a percentage point, taking the target rate to 0.75 percent to 1 percent, in its biggest single rate increase since May 2000.

The central bank said it will also begin the process of reducing its $9 trillion balance sheet, which ballooned during the pandemic as the Fed gobbled up bonds to pump money into the economy.

Reducing the Fed’s balance sheet holdings will have the effect of further raising loan costs throughout the economy, as will the higher benchmark rate.

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