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GOOD NEWS IS WAGES ARE RISING. UNFORTUNATELY, THAT MAY ALSO BE BAD NEWS. HERE'S
WHY.

Medora Lee
USA TODAY


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 * The longer inflation stays hot, the higher risk workers will demand more pay.
 * That could lead firms to raise prices, kicking off a "wage-price spiral" and
   keep inflation high.
 * The IMF says risks of that are low, but some economists aren't so sure. Some
   say one's already here.

Good news: wages are expected to continue rising. Bad news: wages are expected
to continue rising. 

How much wage increases are contributing to four-decade high inflation could
determine whether we’re seeing what economists call a “wage-price spiral” and
could help unlock how high inflation may climb and how long it will stick
around.

The question is so key that the International Monetary Fund devoted an entire
chapter to unpacking the answer in its World Economic Outlook this month. 

A wage-price spiral is when higher prices lead workers to demand higher wages,
which in turn increases costs and pushes prices still higher, setting off a
loop.

In the second quarter, wages accelerated 5.1% annually, below the inflation rate
but the fastest clip since the series began in the first quarter of 2002. 



The IMF concluded risks were low, but some economists believe the U.S. is either
already in a spiral or entering one as people chase inflation higher. 

“Every month inflation remains high, the risk grows that inflation
expectations... move higher too,” Henry Allen, Deutsche Bank analyst, said. “In
turn, firms and individuals will factor this into their price-setting and
wage-bargaining, and expectations of higher inflation then become a
self-fulfilling prophecy.” 



Hire or wait?:Hiring reaches a turning point: Should bosses see if a recession
hits the economy?

Minimum wage list:Somewhere between $5.15 and $16 an hour: A list of the minimum
wage in every state


WHAT ARE THE COMPONENTS OF A WAGE-PRICE SPIRAL? 

High demand for goods and services causes inflation if companies struggle
to meet the demand, which is what happened in the past year to set off the
fastest inflation in a generation. 



Due to the cost of inflation, workers demand more money. In response, businesses
must raise their prices to compensate for the salary increases. As costs spiral
higher, so do wages again, and the wage-price spiral continues.


WHAT ARE SIGNS OF A WAGE-PRICE SPIRAL?

 Fed Chairman Jerome Powell has repeatedly suggested that if inflation
expectations remain tame and manageable, or “anchored,” a wage-price spiral
could be avoided. So far, inflation expectations haven’t jumped too much in
surveys the Fed watches, but economists say there are other signs to watch.

September’s consumer price index remained elevated at an 8.2% annual rate. The
core rate, excluding the volatile food and energy sectors, jumped 6.6%, the
largest gain since August 1982, showing widespread inflation despite the Federal
Reserve’s aggressive rate hikes to cool spending. 

The Fed’s raised its short-term benchmark fed funds interest rate by 3% this
year, and more are expected. These rate increases influence every consumer rate,
including mortgages, auto loans and savings.

Those numbers alone are worrisome, but report details reveal an even more
alarming inflation picture, some economists say. 

“If you want a wage-price spiral, look in core services (excluding) shelter to
see if it’s happening,” said Michael Ashton, founder of Enduring Investments. 




WHAT DOES CORE SERVICES INFLATION SHOW?

Core services inflation, which excludes energy and is seen as long lasting
because these prices tend to change slowly and incorporate long-term inflation
expectations, accelerated to a 40-year high of 6.7%. Even without the heavily
weighted, lagging and accelerating rent, or shelter, category, it rose 6.6%.  

And “some businesses said elevated inflation and higher costs of living were
pushing wages up, coupled with upward pressure from labor market tightness,” the
Fed’s Beige Book said last week. 



This “not even stabilizing, but accelerating is seriously bad news and raises
the prospect that inflation will not decline as rapidly as investors expect over
the months ahead,” Allen said. 

Blunt tool:Here’s the Federal Reserve’s best tool against inflation — and how it
has worked for 40 years

Core matters:Next Fed rate hike size may be based on soaring 'core' costs, not
energy prices


ARE THERE OTHER SIGNS OF A WAGE-PRICE SPIRAL? 

Yes. 

In index data, monthly food-at-home inflation dipped to 0.69% in September from
August’s 0.75%. However, food away from home, like restaurants, rose to 0.94%
from 0.87%.  

“This is bad,” Ashton said. “Food commodities are leveling off a little, but
wages show up in food away from home.”   

Wages have also risen even as productivity has dropped, meaning employers are
paying more for less. Labor costs usually move in tandem with productivity.   

Want a raise:$15 an hour isn't enough. Job seekers want at least $20, making
inflation fight harder

The cost of eating:Food prices soar amid inflation. How much the cost of eggs,
cereal, milk is going up.

Second-quarter productivity slumped 4.1% from the first quarter and 2.4% from
last year, the largest decline since the series began in the first quarter of
1948.  

“That feeds wage inflation,” said Matthew Matigian, Blue World Asset Managers
chief executive. “A company has no choice but to pass on those costs to the
consumer. That feeds consumer prices, and ‘round and ’round we go!” 



Yung-Yu Ma, BMO Wealth Management chief investment strategist, agrees, “a
wage-price spiral is already in motion.” 


HOW CAN THE FED STOP THE WAGE-PRICE SPIRAL, IF THERE IS ONE? 

“Really, the only lever they (the Fed) have is slowing the economy,” Nathaniel
Harmon, research director at market research firm YipitData. “Other options
would need to come from legislative, executive policy of some kind.” 

That means more Fed rate hikes, analysts say, but they warn the process will be
extremely slow. 

Rate hikes at work:Why does the Fed raise interest rates? And how do those hikes
slow inflation?

Recession odds:Is a recession inevitable in 2023? Here's what experts are
saying.

“The good news is that this spiral will gradually shrink in magnitude over
time,” Ma said. “The bad news is that it will indeed take some time to work,
probably more than a year.“ 

Harmon said his data show wages and income growth reaccelerated into September
from August, primarily among lower-income earners. 

Ashton expects inflation will slow but probably not fall much lower than 4%,
“and it will take some years. I’d get used to inflation being somewhat higher
than we were previously used to and get used to it being more volatile than we’d
gotten used to.” 


HOW HIGH WILL RATES HAVE TO GO? 

The Fed’s last projections showed the median projection for the fed funds rate
topping out at 4.6% next year, but a handful of economists, including former
Treasury Secretary Lawrence Summers, predict it will have to go higher. 



Deutsche Bank analysts expect the Fed to raise rates by another 0.75% at each of
its last two meetings of the year, but that won’t be the end. They, like
Summers, forecast the fed funds rate will ultimately have to move to at least 5%
from its current range between 3% and 3.25%. 

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You
can reach her at mjlee@usatoday.com and subscribe to our free Daily Money
newsletter for personal finance tips and business news every Monday through
Friday morning.  







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