- The first half of 2021 indicates a post-pandemic economy with permanently higher prices and wages.
- Rising inflation should cool off, but prices will not return to pre-crisis levels, Fed chairman Jerome Powell said on Wednesday.
- Companies are under pressure to keep wages high as companies compete for a limited supply of labor.
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Higher wages and prices remain. But don’t expect them to climb higher and higher.
The economic reopening and the resulting surge in spending have driven inflation to staggering heights. Increased savings have met rampant supply bottlenecks, which has led to oversized demand and higher prices.
At the same time, the unusual labor shortage has led to exceptional wage growth. Firms struggling to get back on their feet have increased starting salaries to attract workers, with the largest increases seen in sectors hardest hit by the pandemic, such as leisure and hospitality. That has led to the biggest wage jump since at least 2001.
It is still not enough. The consumer spending price index – one of the country’s most closely monitored indicators of inflation – rose 0.5% in June, beating economists’ forecasts and recording the fastest year-on-year price growth since 2008. Prices rose by more than 5% . That dwarfs the decades of high wage growth of around 4.3% and essentially leaves Americans with even less purchasing power than before.
The trend could point to a new normal for Americans. That
– tasked with keeping inflation in check – has announced that price growth will cool as supply chains heal and bottlenecks are removed. However, Fed chief Jerome Powell pointed out in a press conference on Wednesday that while inflation should prove temporary, prices are unlikely to return to pre-pandemic levels.
“The concept of transition is really this: it is that the increases will take place. We are not saying they will turn around, ”he said. “I don’t think manufacturers will take these price increases back. That’s not the idea.” Instead, it means that prices will not continue to rise at the current pace.
Similarly, healthier wage growth will persist. Incentive support during the pandemic made Americans rethink how much their work is worth, and wage increases have emerged in historically low-paying sectors in recent months. Big employers like Amazon, McDonald’s, and Chipotle all rolled out higher entry-level wages during the spring. These moves will raise wages in other companies as companies compete for workers.
The trend is supported by the White House. President Joe Biden praised the wage increases in a speech in June and said the solution to attracting workers is to simply “pay them more”.
“That is now the subject of negotiations for the employees,” he added. “[Employers] have to compete and pay hardworking people a fair wage. “
Still, some experts believe the pandemic-era wage increase is unique and not the beginning of a long-term shift. The “unprecedented” wage growth this year “reflects a one-off re-leveling of low wages,” said Gregory Daco, US chief economist at Oxford Economics, in June.
Goldman Sachs economists see it similarly. Both decades of inflation and stronger wage growth should subside in the coming months as increased unemployment benefits cease and the outliers cool inflation meters, Jan Hatzius’ team said in a statement.
“Ultimately, the biggest question in the overheating debate remains whether US production and employment will rise well above potential in the next few years,” they added. “Our answer is still no.”