As inflation soars to 9.1%, a Financial Times editorial notes that the Biden administration may find itself between a rock and a hard place: on the one hand, encouraging union activity, and on the other, managing a feedback loop between rising wages/prices, potentially leading to high inflation entrenchment.
Wages are rising along with price changes, with the three-month average rate of annual wage growth in May doubling from a year ago to 6.1%, according to the Atlanta Fed. As noted in a separate story, many companies are increasing wages in order to maintain competitive workforces and counter attrition rates.
However, Federal Reserve officials now fear that elevated inflation “could become entrenched” in public expectations, according to the minutes of the last Fed meeting.
Of particular concern is price contagion, an especially risky factor in high-inflation regimes where certain goods are becoming significantly more expensive due to supply chain bottlenecks and the Russia-Ukraine conflict.
“The higher the inflation rate, the greater the incentive for workers to unionize,” notes the Bank for International Settlements’ latest annual report, “and for wage negotiations to be centralized and the more persistent the inflation rate, the greater the incentive to index wages.”
The “hope,” the Financial Times notes, is that “somehow wage growth gently declines as economic activity weakens, before the ‘entrenched’ inflationary psychology that worries the Fed sets in, and/or there is a full-blown recession or an explosion of populism. It will be a miracle if America can avoid all three risks.”