Federal Reserve: Wage Gains Losing Out To Inflation

The Federal Reserve Bank of Dallas issued a report on Tuesday confirming what virtually every ordinary American has known for months: wage increases, to the extent they exist, are quickly losing ground to the inflation hammering the economy.

The report said that even though a tight labor market has led to higher wages on average, most workers are “finding their wages falling even further behind inflation,” Adjusted for inflation, the median decline in real wages exceeds 8.5%.

Even though there have been other periods over the last three decades when wages have fallen behind inflation, the report indicated that 2022 is “unparalleled in terms of the challenge employed workers face.”

The Fed is currently engaged in aggressively raising interest rates in an effort to combat inflation. In response to the highest inflation seen in 40 years, the central bank has raised the overnight lending rate from virtually zero in March to the current level of around 3.25%.

Experts across the spectrum believe that more rate hikes will be coming from the Fed before the end of the year. Fed officials themselves have reported an interest rate target for the end of the year of 4.4% and 4.6% for 2023.

Fed chair Jerome Powell has acknowledged that the interest rates risk driving the economy deeper into recession by reducing investment in production and increasing unemployment. However, he has indicated that the hikes are absolutely necessary to return inflation to near the target rate of 2%.

New York Fed president John Williams also commented on Monday that unemployment will likely rise to around 4.5% in 2023. He added that “history teaches us that price stability is essential to achieving maximum employment over the longer term.” He also acknowledged that the current rate of inflation is hurting the Americans who can least afford it the most.

San Francisco Fed chief Mary Daly said on Tuesday that wage gains in the country are in “a very different place” than during the depth of the COVID-19 pandemic downturn. Even though the labor market remains extremely tight, she noted that employers are providing lower wage increases and other work condition incentives to compensate for production price inflation hitting that part of the economy.

The current risk presented by the Fed’s actions involve the danger of stagflation. That is, if hiking interest rates proves ineffective at bringing inflation down after the massive federal spending during the Biden administration, the country could be faced with continuing inflation and spikes in unemployment at the same time.