What rising wage pressures could mean for inflation


The labor market is still hot. Workers are still empowered. And as a result, Americans are winning higher wages and more favorable benefits.

Even after 18 months of Federal Reserve tightening and abundant recession chatter, the ability of workers to achieve pay gains has hardly diminished.

  • It's creating more sustained inflation risks while simultaneously bolstering household finances.

The Employment Cost Index, the gold standard measure of what employers spend on compensation, rose 1.1% in the third quarter, the Labor Department said. That's a tick higher than in Q2 and above analysts' expectations.

  • Over the last year, wages and salaries for all civilian workers are up 4.6%, unchanged from Q2 and well above the 3% or so that prevailed just before the pandemic.
  • Meanwhile, the UAW and the Big Three automakers have reached deals in recent days that will give workers 25% raises over the coming years and boost compensation by 150% for a low-paid tier of temporary workers.

Both the union move and the new data reflect a delayed reaction process. Groups of workers are finally catching up to the realities of the post-pandemic job market, which has been defined by labor scarcity.

  • Automakers have made boatloads of money in the last three years, empowering their union to demand a clawback of concessions they made during the dark days of 2009.
  • The ECI number was pushed upward by state and local government employees, who saw a 1.5% gain in total compensation in Q3 and 4.8% over the past year. Those workers' pay and benefits hadn't kept up with private sector gains in the hot labor markets of 2021 and 2022, but they're now catching up.

Between higher compensation and lower inflation, workers are now seeing real gains in their purchasing power. The open question is whether inflation can continue its downward march, given wage growth running persistently high.

  • Moreover, the string of major union deals — the new autoworkers' pact and a generous UPS deal with the Teamsters over the summer among them — implies that further wage pressures are in train.
  • Non-unionized employers compete in the same labor market as companies locked into contracts promising strong gains, giving their workers more leverage to demand raises.

There are signs the jobs market has come off its high boil of 2021-22, but continued strong wage growth could create a floor under inflation, leading the Fed to tighten further.

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