By Craig Erwin, Ph.D.
The Federal Reserve, the U.S. central bank, doesn’t get nearly as excited about other types of inflation as it does wage inflation. It doesn’t care as much about housing or food inflation, but when wage inflation spikes, the Fed often leaps into action. The employment-cost index, a measure of wages and benefits, rose the most in 21 years from November 2021 to December 2021. Why did wage inflation shoot up? As Covid-19 showed signs of easing, employers responded, trying to fill jobs as skittish workers, likely fearful of Covid-19, resisted employer efforts to recruit and hire them. And even though consumer spending fell in December, 2021 from November 2021, perhaps due to the Omicron variant, the Fed’s measure of personal-consumption-expenditures (PCEs), a measure of core inflation, rose.
For years the Fed has not needed to raise interest rates because there was little inflation (especially wage inflation). Those days appear to be gone. What will the Fed do? Raise interest rates aggressively, which is likely to drive other interest rates higher, such as mortgage rates and credit card rates. That will cost all of us. Ouch!
Are you or have you been on the job market in the recent past? Have you or your friends and relatives gotten raises? Have the prices of the things you buy rise? Is the cost of living higher now than when Covid-19 struck?
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