What higher pay means for inflation

Illustration: Aïda Amer/Axios

For months, central bankers around the world — including those at the Fed — feared that rising wages would be a big problem for inflation.

• For now, that doesn't appear to be the case.

Why it matters: Inflation is still much too high. But economists say rising pay for workers is not the primary factor fueling price increases at the moment.

Flashback: Late last year, Fed chairman Jerome Powell said wages were not "the principal story of why prices are going up." (The Fed's peers across the Atlantic had a similar message last month: ECB officials noted wages "had only a limited influence on inflation over the past two years" in the bloc.)

By those numbers: Since Powell's comments, workers' pay gains have decelerated further, and are below inflation.

• In the final quarter of 2022, average hourly earnings rose at a 4.7% annualized rate. But last quarter, wages increased at a 3.2% annualized rate (compared to the consumer price index's 3.7% increase by the same measure).
• That pace of wage growth is consistent with inflation settling at the Fed's 2% target. It's also similar to the pace seen in the same time period in 2019.

What they're saying: Higher labor bills are "going to be fading as an excuse for companies to keep prices rising," James Knightley, an economist at ING, tells Axios.

• Knightley adds: "A lot of the inflation that we still see today is basically margin expansion," or higher corporate profits.
• Should those profit margins start to come down, that could aid in painlessly lowering inflation.

What's next: Economists are watching for more compensation data to confirm the story. The employment cost index, known to be closely watched by Powell, is released on Friday.

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