- CFOs face an inflationary spiral that, unlike the runaway inflation of 30 years ago, is primarily fueled by surging prices rather than rising wages, according to a report by Moody’s Analytics.
- Increases in consumer prices have spurred gains in nominal wage growth since 1990, Moody’s found in a causality test comparing changes in the Consumer Price Index (CPI) with the Employment Cost Index (ECI). "Growth in CPI causes changes in the ECI for private workers" during the period, Moody’s said, adding that "the causal relationship runs in one direction."
- "Some of the acceleration in nominal wage growth recently is attributed to the acceleration of inflation, supporting the idea of a price-wage spiral," Moody’s said.
CFOs confront the harshest inflationary pressures in decades, with bottlenecks in the supply of semiconductors, metals and other inputs pushing up the producer price index 9.7% last year. They passed on to consumers some of the higher cost — the CPI in 2021 rose 7%.
Labor markets are also extremely tight, with workforce participation falling below pre-pandemic levels. Companies competing for workers pushed up average hourly earnings 5.7% in January compared with 12 months before, the Labor Department said Friday.
Worker shortages have prompted predictions that U.S. companies will try to improve employee hiring and retention by pushing up wages as much as 5.2% this year.
The finding by Moody’s that wage gains lag increases in prices suggests that employment cost pressures will ease if supply disruptions wane, slowing the rise in producer prices. Federal Reserve Chair Jerome Powell has forecast that supply chain bottlenecks will start to clear and inflation will begin to cool during the summer.
At the same time, recent wage gains will likely lure more workers back into the job market and ease pressure for further increases in compensation. "The good news about the acceleration in nominal wage growth is that labor supply constraints should be less binding," Moody’s said.
Wage increases have spurred growth in the labor force since the mid-1960s, Moody’s said. "Workers normally have a sense of the minimum they will accept — also known as a reservation wage — to take a job."
"With nominal wage growth accelerating, it should pull more people into the labor force this year," Moody’s said. "An end to the pandemic would also be key" to coaxing workers off the sidelines.
As of the end of December, wage gains had not caught up to price increases, suggesting the two are not reinforcing one another in a pattern of rising inflation, Deloitte said in a recent report.
"Although wages have accelerated sharply, they continue to rise more slowly than prices, thereby rendering workers with less purchasing power," Deloitte said. "This means that we have not yet seen the start of a wage-price spiral that would contribute to prolonged inflation."