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MNI INTERVIEW:US Can Handle 4% Wage Gains-Minneapolis Fed Econ

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U.S. workers could ring up wage gains of 4% or more without rattling price stability while inflation may moderate as recent surges in oil and goods prices fade, the Minneapolis Fed's assistant director of the research division and adviser to President Neel Kashkari told MNI.

That 4% pace would be consistent with inflation at the Fed’s 2% target and productivity growing at the same pace according to Terry Fitzgerald, who leads the economic analysis branch and coordinates briefings ahead of FOMC meetings. The share of national income going to workers has slipped over time and if that picked up sustainable wage gains could reach around 4.5%, he said.

Recent big gains aren't leading to a wage-price spiral and it's helpful that some of the largest raises in the pandemic recovery are going to the lowest-earning workers, Fitzgerald said. Wage bargaining has been tamer than say the 1970s with a decline in unionization and few recent major contracts containing special cost of living adjustments, he said.

“I don't think the evidence is there that that's a persistent phenomenon,” he said when discussing a potential cycle of wage and price gains. “Wage growth of four, four and a half percent is reasonably consistent with price stability over the longer term.”

Some wage measures have pushed beyond the 4% mark. Friday's payroll report showed average hourly earnings rose 5.6% in March from a year ago. The Atlanta Fed's wage tracker shows gains of 4.3% over the last year, and an even faster 5.8% gain in the last three months, the fastest since 1990. On the productivity side, annual average growth was 1.4% in the last business cycle from 2007-2019 and has averaged 2.1% since 1947.


Goldman Sachs economists say slowing wage gains to 4%-4.5% risks a hard landing and likely requires more labor supply and Fed rate hikes 75 basis points beyond what’s expected now, citing its forecast for a terminal rate of 3%-3.25%. The last Beige Book showed strong wage gains in the Minneapolis district including increases of at least 5% at four in 10 hospitality and tourism firms.

Pay gains still lag CPI inflation rising the fastest since 1982, with a 7.9% jump in February. Some investors are betting the central bank will embrace one or more half-point interest rate hikes to nudge price gains back towards its 2% target.

“Chair Powell I think was pretty firm in his most recent statement that the Fed is going to do what it takes to make sure we return the economy to price stability while trying to balance that against keeping the labor market strong,” Fitzgerald said.

“The 70s, they were chasing it, they were trying to keep unemployment from getting too high. They were chasing inflation expectations,” he said. Today, “people with money on the line, who have money to lose if they're wrong about inflation bets, still see inflation coming down to 2%,” he said.


Inflation may moderate as goods producers ramp up production and because it's unlikely that prices of energy, furniture and cars will keep rising so fast, Fitzgerald said.

“They may stay high, which is still hard for consumers, but they likely won't increase a lot more,” he said. “Goods historically don't show inflation, goods prices normally fall. And that's a reflection of this pandemic and this huge demand for goods.”

“Supply chains hopefully in the next year or two start loosening a little bit, we see the goods prices coming down again, that's a good start to getting inflation returning to 2%,” he said. “And then it gets to the services inflation and that's the part we're going to be watching.”

Source: US Bureau of Labor Statistics

MNI Ottawa Bureau | +1 613-314-9647 |
MNI Ottawa Bureau | +1 613-314-9647 |

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