(Bloomberg) — If history is any indication, an acceleration in U.S. wages is unlikely to spur inflation.
Nonetheless, a jump in worker pay last month played a role in roiling financial markets on concerns price pressures would eventually develop and prompt a faster pace of Federal Reserve interest-rate hikes than anticipated.
Hourly earnings have grown 2.2 percent on average in this expansion. The average increase in the consumer price gauge that the Fed likes to monitor is 1.5 percent, still short of policy makers’ goal of 2 percent. In the previous two expansions, a surge in wages — sometimes topping 4 percent — failed to deliver or even coincide with a spurt in inflation, according to Joseph LaVorgna, Natixis chief Americas economist.
To find that link, one would have to go back to 1985, he said, adding that the correlation coefficient between wages and inflation since that time is “very low.”
Hourly earnings in January rose from a year earlier by the most since 2009 amid better-than-forecast hiring and an unemployment rate near a 17-year low. But according to LaVorgna, the market’s inflation fears are misplaced. Since wages haven’t been a good signal of inflation in more than three decades, there’s little urgency for the Fed to become more aggressive.
“Wages are really useless in telling you where inflation is going,” LaVorgna said. The uptick in paychecks is probably giving inflation hawks more firepower to make their case before new Fed Chairman Jerome Powell, and “what really makes me worried is, it might be hard for him to resist those calls.”
Average hourly earnings for all private-sector workers, a series that dates back only to 2007, rose 2.9 percent in the 12 months through January, the most since June 2009. Labor Department figures that go back much further and track the wages of production and non-supervisory workers show a more moderate 2.4 percent increase.
Coming months will show whether a long-overdue sustained pickup in worker pay is finally starting. Until then, the jury is also still out on the relevance of the so-called Phillips curve relationship, under which a tightening job market fuels wage gains that feed into inflation.