Rapid wage growth keeps pressure on US inflation

Average hourly earnings grew 5.2% in July from a year earlier, and annual wage gains have exceeded 5% each month this year, the Labor Department said Friday. The rapid earnings growth adds to other evidence that employers are continuing to increase pay as they try to find and keep workers in a tight job market.

Wage gains help consumers spend money in the face of higher prices for restaurant meals, groceries and lodging. But many companies are having to pay more for labor at the same time that other business expenses are rising, including for transportation and logistics, said Omair Sharif, head of forecasting firm Inflation Insights LLC.

“The entire cost structure of operating a business has increased, including wages," Mr. Sharif said. “That’s allowing firms in a high-inflation environment to pass those costs on to consumers."

Mr. Sharif pointed to airlines as an example of the wage-price dynamic. Some airlines have negotiated double-digit wage increases for pilots, as carriers struggled to hire enough of them to meet fast-rising demand for flights. Meanwhile, jet-fuel costs have shot up. Those factors have likely converged to drive up the price of plane tickets, Mr. Sharif said. In June, airfares were up 34.1% from a year earlier.

Wage growth is continuing to run at a fast clip as some other price pressures are abating. The average cost of a gallon of regular unleaded gasoline was $4.06 in early August, compared with $4.72 a month earlier, according to AAA.

Commodity prices for wheat and grain have also eased. Improvements in backlogs and supplier delivery times in business surveys suggest that supply-chain snarls are unraveling.

The Labor Department releases July consumer-price data on Wednesday, and economists surveyed by The Wall Street Journal think annual inflation cooled to 8.7% in July from 9.1% in June.

Strong wage growth is a concern for Federal Reserve officials, economists say. “They view the labor market as too tight. They think wage growth is too fast," said Nick Bunker, economist at jobs site Indeed.

The Fed raised rates by 0.75 percentage point at its meeting last month, as part of a broader attempt to bring four-decade high inflation down to its target of 2%. The July jobs report defied expectations of an economic slowdown and will make it harder for the Fed to dial back the pace of rate increases at its meeting next month.

A wages and benefits report released in late July that is widely watched inside the Fed also defied the idea that wage growth was slowing. Wages and salaries for private-sector workers grew 5.7% in the second quarter from a year earlier, the fastest pace for records tracing back to 2001, the report said.

Wage gains haven't kept pace with inflation. Private-sector wages and salaries declined 3.1% in the second quarter from a year earlier, when accounting for inflation.

Households expect much higher inflation in a year than they did in spring of 2021, which could lead workers to demand higher wages to keep up with the cost of living. That might push up broader inflation, at least in the short run, according to a new Federal Reserve Bank of San Francisco analysis.

The trajectory of wage growth depends largely on how long labor shortages last. Pay is rising quickly because there are too few workers to meet companies’ needs.

Job openings well exceed the number of unemployed Americans seeking work. There are fewer people seeking a job than before the pandemic, with scant evidence that the situation will quickly improve. In fact, the share of adults working or looking for a job decreased in July from a month earlier.

Workers are quitting their jobs at higher rates than before the pandemic took hold in early 2020. About 2.8% of employees quit their jobs in June, up from 2.3% in February 2020.

“Workers are still willing and confident enough to leave their current job to look for another one," said Kathy Bostjancic, economist at Oxford Economics. “Part of the reason to do that is to seek out higher wages."

Job switchers are contributing to overall wage growth as they reap bigger pay increases and put pressure on employers to raise pay for existing employees.

In the years following the 2007-09 recession, wage growth was fairly weak despite historically low unemployment. Some economists argued that was because workers were reluctant to switch jobs.