MNI: Survey Hints At Wage-Price Spiral -Atlanta Fed's Meyer

A lack of available U.S. workers and rising inflation expectations among firms and consumers could perpetuate the current elevated inflation environment well after the pandemic-driven surge in prices has reversed, or even kick off a wage-price spiral, Atlanta Fed economist Brent Meyer said in an interview.

"October 2021 might have been the high-water mark" for CPI, "but this does not imply that we’ve seen the last of high inflation," Meyer said. "I'm starting to be very concerned about what we're seeing in inflation expectations now."

Year-ahead business inflation expectations, as measured by the bank's monthly survey of firms in the Fed region, aren't budging from the all-time high of 3.4%, while the survey's measure of longer-run inflation expectations has also picked up, according to data released Wednesday.

"About half of the current U.S. population was born after 1980, the U.S.’s last stint with high inflation, and I suspect this is the first high inflationary cycle many firm managers are going through," Meyer said. "I see this a bit of a wild card when it comes to businesses’ inflation expectations."

WAGE-PRICE SPIRAL

Many firms indicated in the survey that they anticipate sharply higher wage growth over the next 12 months, on average 10% for low-skill positions and 6% for high-skilled jobs.

"We're getting the sense that wage growth has become more broad-based," Meyer said. "Typically, decisions on wage growth and cost-of-living adjustments happen once a year. Adjustments [are] coming fast and furious at the moment."

Also surprising is that a few firms have started reporting that their sales were "insensitive" to even a 10% increase in prices, an indication of sustained strong demand.

Rising labor cost are pushing prices higher. If expectations of higher inflation also cause workers to command bigger raises, a 70s-style wage-price spiral could take hold. (See MNI: Services Inflation Seen As The Fed's Next Big Problem and MNI INTERVIEW: Fed Inflation View Still Too Benign- Blanchard)

"I would hesitate to call it that, but that sort of dynamic is not too far off from what could potentially happen," Meyer said.

CPI HAS EBBED

Despite the Omicron coronavirus variant's threatening to delay the easing of supply chain disruptions that the Fed had been expecting by mid-year, Meyer noted that both CPI and trimmed-mean measures of inflation have ebbed since October, falling to a 6% and 5% annualized rate in December from 12% and 9% two months earlier, respectively.

Still, more than half of the consumer market basket rose at rates in excess of 5% last month. In a pre-pandemic world, the distribution of price changes was centered around 2%. Now it looks like the center of the distribution has shifted up to 3%-4%, Meyer said.

"The question going forward is whether persistent inflationary pressure will continue on even after many of the outsized, pandemic-induced relative price increases dissipated or reversed."