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The key to Fed rate hikes?


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The key to Fed rate hikes? It may end up being the 2022 paychecks of Americans

Eric Rosenbaum CNBC
KEY POINTS
  • The Federal Reserve is anticipating multiple rate hikes in 2022 as the economy strengthens and concerns about inflation remain central to monetary policy.
  • Many forms of inflation may prove short-lived and ebb with supply chain improvements next year, but wage inflation can be stickier.
  • Fed Chair Jerome Powell cited wages as a key inflation signal to watch in 2022, and there are fears of what is known as a wage-price spiral, in which rising pay feeds rising prices. Some economists say it is already here.
 

A shopper walks by a sign displaying $1.25 price, posted on the shelves of a Dollar Tree store in Alhambra, California, December 10, 2021. The store is known for its $1 items, but due to inflation raised prices to $1.25.

A shopper walks by a sign displaying $1.25 price, posted on the shelves of a Dollar Tree store in Alhambra, California, December 10, 2021. The store is known for its $1 items, but due to inflation raised prices to $1.25.
FREDERIC J. BROWN | AFP | Getty Images

More than half of U.S. states are raising minimum wages next year, but employers are moving even faster on pay increases.

Salary budget increases set by employers for 2022 are higher than they have been in at least a decade, with 99% of employers planning raises and many planning increases of 5% to 6% in 2022, according to compensation consulting firm surveys. Deloitte’s fourth quarter CFO Signals survey funds 97% of CFOs saying that labor costs will increase substantially in 2022.

 

Top companies are aggressively fighting for talent and fighting their own employees’ demands for higher pay to fight inflation. Apple is reportedly even paying rare $180,000 stock bonuses to keep engineers for going to tech rivals.

But while the Federal Reserve says wage inflation is a factor to monitor in 2022, it is not a primary inflation driver yet.

Some economists aren’t as sure as the central bank that rising pay isn’t already contributing to what is known as a wage-price spiral, a labor market dynamic in which wage inflation leads to higher prices, and higher prices lead to calls for even higher pay.

“It is here,” said Lynn Reaser, chief economist and professor of economics at Point Loma Nazarene University. “You’ve seen it in the restaurant industry, not only the price increases in the cost of serving meals from the ingredient side, but from the attempt to desperately recruit new workers, and restaurants passing it along to customers in the form of higher prices.”

Reaser says it is not only the restaurant industry, hard-hit by the pandemic, though. Manufacturers are testing the waters for how much they can raise prices, and producers supplying grocery stores are citing labor costs as one of the driving them to consider higher prices.

 

Producer prices rose at the fastest rate on record in November.

“A wage-price spiral has started,” wrote Sung Won Sohn, professor of finance and economics at Loyola Marymount University and head of SS Economics.

In a period when businesses have no problem hiking prices, “the spiral, once begins, it is hard to stop,” he wrote, citing data from the Atlanta Fed on how higher labor costs are being passed along to consumers with little resistance.

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