MNI INTERVIEW: Wages Minor Part Of US Inflation-Fed’s Wozniak

A hot post-pandemic job market complicates the Federal Reserve’s job of bringing down inflation but wages are only a small contributor to price pressures thus far, meaning policymakers can still pull off a soft landing, Minneapolis Fed Vice President Abigail Wozniak told MNI.

“The early evidence suggests that wages are only part of the story and probably a smallish part of the story of the ongoing inflation that we are experiencing – or certainly the inflation that we’ve experienced to date,” she said.

That means the central bank can still rein in inflation without a major spike in a jobless rate still hovering around 50-year lows, she told MNI’s FedSpeak Podcast.

“This certainly means that it is a possibility. There’s still a path for that,” said Wozniak, who serves as director of the Minneapolis Fed’s Opportunity and Inclusive Growth Institute.

Wozniak, a labor economist, said it’s encouraging strong hiring conditions have benefited lowest-paid workers the most in this recovery.

“A huge change that we’ve seen is a lot of pressure for the part of the labor market that employs our lowest-earning workers. Those workers have seen real wage gains,” she said. “That’s been pretty dramatic. It hasn’t been sufficient to reverse the decline in those relative earnings that has happened since the 1980s but it has made a measurable dent in that.”

And the rise in inflation has not hit those lower down the scale disproportionately harder relative to their incomes, as might have occurred in an economic downturn with high joblessness.

“The overall impact on household budgets, relatively speaking, is somewhat modest. That means inflation has an impact on household bottom lines that’s relatively equal across the distribution, as compared to some other things we might experience – the other big thing I’m thinking of is a recession which is going to have massive disproportionate effects,” she said.

INFLATION PERSISTENCE

Wozniak said it’s prudent to worry that the recent decline in inflation will not persist in a totally linear fashion, noting high levels of uncertainty.

“It’s right to be concerned that the correction that we’ve seen so far could be different for that subsequent remainder of the correction that we need to see. That possibility is worrisome and I don’t think we have a good handle on that,” she said. (See MNI INTERVIEW: Sticky Prices Could Require More Hikes-Fed Econ)

A rebound in immigration into the United States should help moderate wage pressures, said Wozniak.

“It may have the effect of removing some of that pressure in the lower earnings part of the labor market,” she said. “But I still think the fundamentals are suggesting that we’re going to be in a somewhat different place going forward than we were over the last four decades, of just seeing continued erosion of relative earnings for those lowest earnings workers.”