Rising U.S. labor costs are doing little to push up inflation, researchers at the San Francisco Federal Reserve Bank said on Tuesday, a finding that could undercut the argument that wage growth is key to rising price pressures.
Adam Shapiro’s analysis in the latest FRBSF Economic Letter shows that labor costs, as measured by the Employment Cost Index, contribute nothing to goods or housing services inflation and account for only a small fraction of non-housing Part of service inflation.
The Employment Cost Index (ECI), the broadest measure in the US, rose sharply with inflation from 2021 to 2021 An indicator of labor costs, Fed policymakers followed suit. It peaked at around 5.1% mid-year2022 and slowed to a 4.8% annualized rate in the first quarter.
Meanwhile, inflation, the Fed’s preferred measure, peaked at around 7% last year and was at 4.4% in April, still more than double the Fed’s 2% target.
Shapiro’s analysis suggests that the recent surge in the ECI explained only one-tenth of the three percentage point increase in underlying inflation over the same period
Shapiro wrote that wages may actually follow it rather than drive inflation. “The results highlight the risks that near-term increases in labor costs may not be sufficient to gauge the inflation outlook,” he concluded.