Fed Losing Control, Unruly Wage, Price Data Screams

A closely watched measure of worker compensation rose more than expected in the second quarter, while a key gauge of core prices came in hotter than forecast.

Taken together, the data underscored the urgency of the Fed’s inflation fight, which escalated this week when policymakers delivered a second consecutive jumbo-sized rate hike.

The employment cost index, which Jerome Powell cited late last year during a dramatized retelling of the moment he changed his mind about the proper course of policy in the face of generationally high inflation, rose 1.3% during the three-month period ended in June, the BLS said Friday. Consensus expected 1.2%.

With the exception of Q1, last quarter’s increase was the largest on record. On a 12-month, unadjusted basis, compensation costs for all civilian workers rose 5.1%, a new all-time high. For private industry workers, that figure was 5.5%.

The data could fan fears of a wage-price spiral. Plainly, employers are experiencing persistent upward pressure on comp costs and it certainly appears as though the self-feeding dynamic wherein pay chases prices higher (and vice versa, as companies raise prices to consumers to protect margins), is more entrenched than officials are willing to publicly concede.

Wages and salaries for private industry employees rose an eye-watering 5.7% YoY in the June period. That too was a record, and not by a slim margin (figure below).

The cost of benefits for private industry workers rose 5.3% YoY in Q2. That marked a sharp acceleration from Q1’s 12-month rate and was the highest since Q1 2005.

A quick look at the breakdown by occupation showed the 12-month increase in wages for leisure and hospitality workers actually decelerated a bit, but only to a still sky-high 8.2% (it was nearly 9% in Q1).

There was scant evidence (where that means scarcely any at all) to suggest wage-price spiral concerns are unfounded or otherwise far-fetched. If anything, the ECI data will likely put the Fed on the defensive when it comes to explaining why officials aren’t more worried about the dynamic. In hiking rates by 100bps this month, the Bank of Canada explicitly warned on the risks.

Meanwhile, core PCE prices rose 0.6% MoM in June, separate data from the BEA showed. That was hotter than the 0.5% increase economists forecast.

Fed officials, you’re reminded, are looking closely at the monthly inflation prints for evidence that price pressures may be abating. Instead, they’re getting evidence to the contrary. June’s MoM core PCE print was the hottest since April of 2021 (figure above).

Taken with June’s disastrous CPI report, Friday’s PCE price data painted a picture of a Fed that remained woefully behind the curve ahead of this month’s policy gathering.

The headline PCE gauge was likewise hotter than expected. PCE prices rose 1% from May and 6.8% YoY (figure below). Even longer-run moving averages are now approaching an overshoot on the order of two full percentage points, a totally unacceptable outcome on any interpretation.

The 12-month headline print was the highest since January 1982 and represented a marked acceleration versus May’s rate. The YoY pace of core price growth, at 4.8%, was likewise quicker than May.

Friday’s numbers laid bare the folly of suggesting Fed officials are anywhere near a dovish pivot. The data unequivocally showed inflation is entrenched in the world’s largest economy. Indeed, if the wage and compensation figures are any indication, the US is perilously close to a tipping point beyond which it’ll be very difficult for the Fed to regain control.

Of course, that assumes they had control in the first place — that a prolonged period of well-anchored inflation was the result of prudent, independent monetary policy and not simply a byproduct of myriad well-documented, secular disinflationary trends. That assumption now seems tenuous, at best.

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7 thoughts on “Fed Losing Control, Unruly Wage, Price Data Screams

  1. It’s hard to blame any employee who gets a 5% raise in a 9% broad inflationary environment.
    To be clear: Employers are the ones giving raises and creating the “wage price spiral”.
    Most companies only provide raises annually so, just like rent, there will be a rolling set of data each quarter as employees and employers all try to stay competitive in the hiring market.
    Of course too, wage gains are often uneven: those with the most bargaining power usually need a raise the least.

    My takeaway is that the Fed blew an opportunity by not doing 100 bps: the psychology of the stock market is clearly ready for a dovish pivot and Inflation’s still a huge problem so missing any chance/efficiency is an unforced error.

  2. If August inflation readings come in hot (i.e., +8%), I would not be surprised to see the Fed surprise us with an inter-meeting hike.

  3. The fed can’t control inflation alone, fiscal spending and policy / regulatory / geo-political matter as well.

    Consumer facing employees gave employers the middle finger for getting paid, too little, while taking serious medical risks – of course there is going to be raise price increases.

    Some of the work force, switched to YOL-ing because the regulatory frame work didn’t place the proper regulatory rails on options or the token market, and allowed full on manipulation.

    Putin and MBS realized how much economic power they have, to weaponize portions of the market.

    This is not only a FED problem!!!

    1. All of those are excellent points in support of the “Fed never had control” hypothesis. Some during a decade-plus binge of QE, it seems they lost control and we are only noticing now that disinflationary trends have abated. (Or so that scary hypothesis goes.)

  4. US Congress just approved a 4.6% pay increase into 2023 for the US military. While well below current inflation, this annual increase is ~67% more than the average annual pay increase for the prior five years.

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