White House drops new wage measurement as Fed ponders more rate hikes
The White House released new wage growth figures Wednesday arguing that a sector of the economy crucial to the Federal Reserve’s fight against inflation is actually weaker than bank officials may believe.
The new wage measure, often referred to “supercore” wages, pertains specifically to the services sector without housing, which includes labor-intensive businesses like restaurants and salons.
The Fed has been concerned about how many nonhousing businesses in the service sector are still struggling to fill open jobs and keep employees from taking other gigs with better pay and benefits.
Fed officials believe this dynamic has put too much pressure on wages and prices in those industries, which has kept inflation higher than the bank would like. The Fed seems likely to impose more economy-slowing rate hikes after the unemployment rate dropped to 3.4 percent
But the new gauge from the White House suggests the opposite, showing steep declines in the so-called supercore wage growth that the Fed believes is closely tied to the labor market.
Annual supercore wage growth has fallen from 8 percent to just over 5 percent in January, the White House’s Council of Economic Advisers (CEA) found. That’s a much more rapid drop in wage growth than for all private sector employees, which fell from 5.9 percent last March to 4.4 in January.
It’s also a much steeper decline than prices have experienced in the supercore sector, which have been hovering around 4 percent, suggesting a less–than-definite relationship between inflation and wages.
“[Core nonhousing services] inflation … has garnered considerable interest of late. Because non-housing services are more labor intensive than the other categories, some surmise that the tight labor market may be playing a meaningful role in this part of inflation,” CEA economists wrote in a blog post published Wednesday.
The findings from the White House run counter to some assertions made by Fed officials recently.
“We’ve seen no progress so far, virtually no progress in core services [exlcuding] housing, and that’s very tied to the labor market,” Minneapolis Fed President Neel Kashkari said on the CNBC television network on Tuesday morning. “I’m not seeing that we’ve made enough progress to declare victory.”
The White House findings could challenge future arguments that the Fed will have to keep raising interest rates to bring down inflation in response to a persistently tight labor market. Unemployment fell to 3.4 percent in January from 3.5 percent in December, hitting the lowest level since 1969.
CEA economist Ernie Tedeschi told The Wall Street Journal that the new research didn’t take a stand on whether labor costs were the primary driver of inflation in the supercore sector. However, the White House economists did say their numbers “outperformed” more traditional metrics such as the Labor Department’s Employment Cost Index and other official measurements.
“This result suggests that [the new measurement] improves economists’ ability to identify the drivers of [supercore] inflation,” they wrote.
While it will likely take time for the new measurement to be incorporated into policymaking, economist have been responding favorably to the new statistic.
“Concern about wage growth in core services [excluding] housing animates much of [the] Fed’s insistence on pushing for lower labor market tightness. But new measure of wages in that sector shows rapid reduction in nominal wage growth, which is additionally shown to predict future dis-inflation,” University of Massachusetts economist Arin Dube wrote online in response to the new calculations by the White House.
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