Source: Tom Ozimek
The high-octane stimulus-fueled economic rebound combined with the “Great Resignation” labor crunch has forced U.S. employers to lift wages sharply to attract and retain staff, but while January’s over-the-year wage gains are positive in nominal terms, they disappoint in real terms as the red-hot pace of inflation means many American workers got an effective pay cut.
Average hourly earnings of all private-sector employees rose by 23 cents to $31.63 in January, for an over-the-year increase of 5.7 percent, according to the latest earnings data from the Bureau of Labor Statistics (BLS). The number came as an upside surprise to forecasters, who expected a more modest 5.2 percent rise after wages grew 4.9 percent in the 12 months through December.
American workers are sure to see the earnings bump a welcome development and confirmation of a boost in their bargaining power. Yet surging prices have more than erased those gains, pushing inflation-adjusted earnings, or real wages, into negative territory and actually reducing many households’ purchasing power.
Inflation accelerated in the year through January to a blistering pace of 7.5 percent, a 40-year high. Applying that rate as a deflator against wage gains—which is standard practice in such calculations—means that real average hourly earnings actually declined 1.7 percent within the same time period.
What’s more, when combining the real hourly wage decline with a 1.4 percent drop in the average workweek, real average weekly earnings over the same period fell by 3.1 percent. In the year through December, real average weekly earnings fell 2.0 percent.
Still, there was a glimmer of hope in the BLS earnings data for those U.S. workers whose wages have made gains on paper but saw cuts in real terms. On a monthly basis, from December to January, real wages managed to eke out a 0.1 percent gain. The positive balance was driven by a 0.7 percent increase in earnings and a slightly lower 0.6 percent pace of month-over-month inflation. In December, real hourly earnings were flat and in November, they declined 0.4 percent.
President Joe Biden, who on Thursday admitted that rising inflation was creating “stress at the kitchen table,” touted January’s monthly wage boost.
“While today’s report is elevated, forecasters continue to project inflation easing substantially by the end of 2022. And fortunately we saw positive real wage growth last month,” Biden said in a statement.
Biden added that his administration would do all it can to “win this fight” against surging prices, singling out such measures as shoring up domestic supply chains, pushing for cheaper prescription drugs, and promoting more market competition.
Accelerating prices and further firming in the labor market have prompted the Fed to signal readiness to pick up the pace of tightening its loose monetary settings.
St. Louis Federal Reserve President James Bullard said Thursday’s hotter-than-expected 7.5 percent inflation print made him “dramatically” more hawkish. He now wants a full percentage point of rate hikes over the next three Fed policy meetings.
The inflation data has also prompted a number of analysts to raise their forecasts for the overall number of Fed rate hikes in 2022.
Goldman Sachs upped its prediction from five to seven consecutive hikes of 25 basis points each this year, followed by three more quarterly increases next year, to a terminal rate of 2.5 percent to 2.75 percent.
Bank of America analysts also see seven quarter-percentage-point hikes in 2022, while predicting another four in 2023.