Fading Inflation? Here Comes a Wage-Price Spiral, BCA Says

This too shall pass. That has been the line from the Federal Reserve and the White House about surging inflation lately, with the Consumer Price Index (CPI) jumping 6.2% year-over-year last month. Now worker pay has started to escalate, which to some is a sign threatening the wage-price spiral that dogged the 1970s.

“Consumer price pressures in the US are becoming broad-based and wages are accelerating,” wrote Peter Berezin, research director at BCA Research. “Hence, inflation in the US will prove to be not so transitory.”

For the 12-month period ending in September, wages and salaries climbed 4.2%, according to the US Bureau of Labor Statistics. In the leisure and hospitality sector, previously devastated by the pandemic and now opening up (or trying to), the increase was even more pronounced, at 7.6%. This is a labor-intensive area, with pay a large component of costs. McDonald’s, for instance, has jacked up compensation 15% lately, in a bid to entice scarce workers. No surprise that restaurant prices are up 6.8% over the past six months.

To Berezin, the wage-price escalation will enjoy a short-lived respite as surging consumer demand for goods eases and supply-chain disruptions unsnarl, before the spiral kicks in again. “US inflation should dip over the next six to nine months,” he predicted. The path of wage inflation, he said, is a “two steps up, one step down trajectory of higher highs and higher lows.”

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After that, it’s back to the inflation express. “The respite from inflation will not last long, however,” he cautioned. At this stage, he pointed out, the bulk of the wage growth has been at the bottom end of the income ladder. “Wage growth will broaden over the course of 2022, setting the scene for a price-wage spiral in 2023,” he added.

Berezin has little faith in the Federal Reserve to boost interest rates soon, in an effort to quell swelling inflation. “We doubt that either fiscal or monetary policy will tighten fast enough to prevent such a spiral from emerging,” he said. As a result, US inflation will surprise meaningfully on the upside. Right now, futures markets and Fed hints suggest that no rate hikes will occur before mid-year 2022.

Of course, not everyone agrees with the BCA strategist. Mark Zandi, chief economist at Moody’s Analytics, wrote in an opinion piece for CNN that “this uncomfortably high inflation isn’t here to stay.” By his assessment, “as Delta fades and workers get healthy and return to work, the acute labor shortages and outsize pay increases will end, which means higher prices will, too.”