Dive Brief:
- The outlook for the highest inflation rate in four decades hinges on whether the tight U.S. labor market continues to fuel the fastest increase in wages since the early 1980s, according to former Treasury Secretary Lawrence Summers.
- “I don’t think there’s a durable reduction in inflation without a meaningful reduction in wage growth,” Summers said Tuesday. “Right now with the labor market so tight, I don’t see such a meaningful reduction in wage growth.”
- The U.S. economy may be headed toward a downturn, Summers warned during a Washington Post webcast. “When inflation has been above 4%, unemployment has been below 4%, we’ve always had a recession within the next two years,” he said. “The likelihood is that we’re not going to get through this with a soft landing.”
Dive Insight:
CFOs for months have raised compensation as pandemic lockdowns and reluctance among workers to rejoin the labor force shrunk the pool of available labor. The employment cost index during the first quarter rose 1.4% for a 4.5% year-over year increase.
In April, the consumer price index increased 8.3% year-over-year, while the Fed’s preferred measure of inflation — the core personal consumption expenditures price index — rose 4.9%, according to the Labor Department.
The persistent price pressure increases concerns that consumer expectations for low long-term inflation will fade, prompting demands for higher pay and triggering a self-reinforcing upward spiral in prices and wages.