Americans are enjoying outsized pay boosts this year from desperate employers, but the raises are failing to keep pace with surging prices for everyday goods.
U.S. wages likely posted a third strong monthly gain to fuel a 3.6% increase in June from a year earlier, according to economists’ forecasts ahead of the Labor Department’s jobs report due Friday. Companies including FedEx Corp. and Olive Garden owner Darden Restaurants Inc. are raising wages to attract staff.
At the same time, prices for everything from milk to car rentals and gasoline are rising at a rapid clip, eating into those income gains. The Federal Reserve’s preferred consumer-price gauge rose 3.9% in the 12 months through May, the fastest since 2008.
The parallel surges are shaping the debate over President Joe Biden’s proposed $4 trillion economic agenda. The hearty wage gains, particularly for the lowest-paid workers, are a boon to the administration, which argues price pressures will dissipate by next year and more spending over time won’t stoke inflation.
Republicans, meanwhile, have seized on the inflation numbers to argue against Biden’s spending plans and highlighted the pain from price gains: People with low incomes are hit particularly hard by inflation, since they spend a higher proportion of their funds on daily expenses like food and transportation.
“As a company, you’re going to have to pay up to hire,” said James Knightley, ING’s chief international economist. “But the cost of living is going up pretty rapidly. So really at this stage, you’re allowing people to tread water at the very best.”
Higher wages may indeed be helping companies hire. Private employers added a greater-than-expected 692,000 jobs in June, according to a report Wednesday from the ADP Research Institute, which said leisure and hospitality businesses posted the strongest gain.
FedEx is a prime example of how the labor dynamic is fueling inflation. The delivery giant is increasing wages to attract employees as shipping volumes grow and service delays mount. The pay rises are flowing into higher rates and surcharges to customers, which executives say is necessary to sustain profits.
What Bloomberg Economics Says...
“As the year progresses, higher inflation -- a consequence of reopening -- will start to put a cap on spending power. Affordability concerns are already restraining buying plans for cars, appliances and homes.”
-- Andrew Husby and Yelena Shulyatyeva, economists
Darden Restaurants said on an earnings conference call last week that hourly labor costs are up about 6% and commodity prices rose 2.5%, though “simplified operations” have boosted profit margins. Darden and other service and hospitality companies have had to boost starting wages as they don’t have enough workers to meet the demand of vaccinated Americans who feel more comfortable dining out and traveling.
According to the Federal Reserve’s Beige Book business survey, some hourly workers in the Boston region recently saw pay rise 30%. In the Philadelphia Fed district, one-third of non-factory companies reported higher employee costs amid signing and retention bonuses.
Service industries tend to be among the lowest paid, indicating that pay gains in the reopening economy are going to the bottom end of the income scale. Yet grocery staples including meat and dairy are seeing some of the biggest price increases.
Even with higher inflation, workers are still coming out on top, according to Rakeen Mabud, chief economist at Groundwork Collaborative, a left-leaning think tank.
“People on the ground know what they’re experiencing” and “their circumstances are improving,” Mabud said, citing other evidence such as bulked-up benefits and more people quitting jobs voluntarily. “Inflation fears at the moment are really just a smokescreen for choosing not to invest.”
It’s not just the wage gains that are fattening wallets. Spending is being bolstered by about $1.6 trillion in pent-up savings from stimulus checks and higher unemployment benefits throughout the pandemic. People are also feeling a lot better about their own economic prospects, with consumer confidence soaring to a new pandemic high in June.
Jared Bernstein, a member of the White House Council of Economic Advisers, said recent price movements are “signals” rather than long-term trends.
Contrast that with the Republican line. “Inflation is raging,” Senate GOP leader Mitch McConnell said Monday. “Now we are confronted with an administration that would like to spend $5 trillion more, on top of the $2 trillion” from the pandemic relief package in March.
Meanwhile, wage pressures are even hitting companies that specialize in helping clients plan costs and hiring. Paychex Inc. boosted pay by about 20% for some of its entry-level payroll specialists to about $18 an hour, an amount that usually took those workers about two years to reach, according to Chief Executive Officer Martin Mucci.
“The biggest issue right now is hiring,” said Mucci, speaking about the broader U.S. labor market. “The pressure is, ‘Can I find the people? I’ll worry about the wages secondarily.’”
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