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Rising wages are doing more good than bad, Fed's Powell says

Rising wages aren't contributing to decade-high inflation, Fed Chair Jerome Powell said Wednesday.

Article originally published by Business Insider. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

  • Rising wages aren't contributing to decade-high inflation, Fed Chair Jerome Powell said Wednesday.
  • Today's trend is different and healthier than the wage-price spiral of the 1970s, he added.
  • The comments echo remarks from President Joe Biden, who's repeatedly praised the jump in worker pay.

Wages are rising, but not to a degree that should concern economists, Federal Reserve Chair Jerome Powell said Wednesday.

The months-long labor shortage has prompted some businesses to raise wages as they scramble to rehire. Average hourly earnings rose at an unusually fast pace through spring, and healthy job creation in sectors with the largest pay bumps suggests the raises are working.

Yet the increases have raised some concerns around how higher pay might boost inflation. Price growth hit the fastest pace since April 2008 last month, reflecting dire supply shortages and overwhelming demand in the US economy. Higher pay could further accelerate inflation by lifting consumer spending and leading companies to charge more.

Such a process can occur, but it's not what the economy is experiencing today, Powell said in a press conference following the Federal Open Market Committee's July meeting. The US faced a wage-price spiral in the Great Inflation of the 1970s as companies used higher prices to offset rising labor costs. Since wages have steadily risen alongside broader price growth, the current trend is more healthy than concerning, the Fed chair said.

"Wages moving across the spectrum consistent with inflation and productivity is a good thing," he added.

The FOMC elected to hold interest rates near zero and maintain asset purchases of at least $120 billion per month. Powell hinted that participants discussed plans to taper the purchases, but gave little indication of when action would take place.

To be sure, the jump in wages is easily outpaced by the inflation uptick. On net, average pay has declined due to broadly higher prices. Minimum wage workers who haven't benefitted from the jump are the poorest they've been in decades.

Economists also expect the leap in wages to be a one-off. It's unlikely businesses will factor higher inflation into their wage-setting plans for next year, Gregory Daco, chief US economist at Oxford Economics, said in June. The increase is more a "one-time releveling of low wages" than a permanent shift in workers' bargaining power, he added.

That hasn't stopped policymakers from cheering the gains so far. Labor Secretary Marty Walsh said earlier in July that the administration isn't worried at all about higher pay adding to inflation.

"I think steady wage growth is good for workers. The one thing that we are not concerned about is … inflation," Walsh told Insider. "We're still in transition, so we're not concerned about that. So I think anytime we can push for higher wages - and the president's been very vocal on this - that's a good thing for people."

President Joe Biden made similar remarks in June, saying employers should simply "pay [workers] more!" if they were struggling with the labor shortage. The pay hikes are a result of employees having a stronger bargaining chip now, he added.


This article was written by bwinck@businessinsider.com (Ben Winck) from Business Insider and was legally licensed through the Industry Dive publisher network. Please direct all licensing questions to legal@industrydive.com.


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    Article originally published by Business Insider. Hargreaves Lansdown is not responsible for its content or accuracy and may not share the author's views. News and research are not personal recommendations to deal. All investments can fall in value so you could get back less than you invest.

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