US workers' wage gains in 2023 are likely to exceed inflation | PIIE
S E E D E D C O N T E N T
Joseph E. Gagnon (PIIE) and Asher Rose (PIIE)
Date
US workers lost ggroundin 2022 as their wages did not keep up with inflation, but they should regain some of those losses in 2023. Forecasters project that inflation will decline next year. There is considerable disagreement over the size of the reduction, mainly reflecting uncertainty about how fast the hot economy and labor market will cool off. But whatever happens to the labor market, inflation is likely to fall far below wage growth in 2023.
The latest Survey of Professional Forecasters projects a rapid slowdown of inflation from 5.9 percent in 2022 (Q4/Q4) to 2.9 percent in 2023, followed by a modest decline in 2024 to 2.3 percent. The 2024 projection is reasonably close to the Federal Reserve's inflation target of 2 percent. (In this post, inflation is defined in terms of the personal consumption expenditures (PCE) price index, which is what the Fed targets.)
Jason Furman and Wilson Powell have questioned whether such a projection is too optimistic in light of continued rapid growth in labor costs owing to a hot labor market. This post lays out the case for a cooler labor market in 2023. Regardless of the pace of wage increases next year, prices are likely to rise less than wages.[1]
Labor cost growth may cool quickly
The rate of unemployment, at 3.7 percent, is only slightly below the Federal Reserve's estimate of the long-run equilibrium rate of 4 percent. However, it is likely that the COVID-19 pandemic significantly raised the equilibrium rate and that it is only slowly returning toward 4 percent. The historically high job vacancy rate is one of several indicators pointing to an overheated labor market.
Professional forecasters currently expect the unemployment rate to rise to 4.3 percent by Q3 of next year and 4.4 percent by Q4. Vacancies are likely to be much lower by then, consistent with a labor market that is close to equilibrium. If so, labor costs should slow dramatically. That's because previous research shows that growth of the employment cost index (ECI) moves rapidly toward about 3 percent once the unemployment rate reaches its equilibrium level.[2] Over the 20 years prior to the COVID-19 pandemic, the PCE inflation rate averaged about 0.8 percentage point lower than the ECI growth rate, so that an ECI growth rate at or just below 3 percent would be consistent with a PCE inflation rate of about 2 percent.
Inflation may drop sharply even if labor costs do not cool off quickly
If the equilibrium rate of unemployment is higher than next year's actual rate, the ECI growth rate will not decline to near 3 percent. Indeed, professional forecasters expect ECI to rise 4.3 percent in 2023 relative to 2022.[3] Figure 1 displays the growth rate of the ECI over the past 20 years along with a projection over the next two that is a bit higher than that of professional forecasters.[4] Twelve-month ECI growth peaked at 5.4 percent in June 2022 and declined to 5.1 percent as of September. In the projection, ECI rises at an annualized pace of 5 percent from September 2022 to March 2023, 4.5 percent from March to December 2023, and 4 percent in 2024. This projection is consistent with only a modest cooling in the labor market and an unemployment rate still somewhat lower than its equilibrium rate.[5] Further reductions in inflation beyond 2024 would require ECI growth to slow well below a 4 percent pace.
To see how inflation can move down with only a modest deceleration in wages, it is useful to separate PCE prices into three categories: durable goods such as autos and appliances, nondurable goods such as groceries and clothing, and services such as haircuts and hotel stays. For each category, we regressed the ratio of the PCE price to the ECI on energy prices as a ratio to ECI, food prices as a ratio to ECI, and a time trend.[8]
- PCE services prices do not respond in any meaningful way to food and energy prices, nor do they have a notable trend; they closely follow ECI.
- PCE nondurable goods prices respond positively to food and energy prices and they have a modest downward trend relative to ECI.
- PCE durable goods prices respond positively to food prices, negatively to energy prices, and have a pronounced downward trend relative to ECI. Dropping energy prices from the regression has no impact on our results.
Figure 2 displays the ratios of each of these PCE components to ECI (the solid lines) and their predicted values from the regression models (the dashed lines). The figure shows that services prices hew closely to labor costs (ECI)—their ratio is essentially constant. For durables and nondurables prices, there is an important response to raw materials prices. The strong downward trend in durable goods prices relative to ECI reflects high productivity growth in the durable-goods sector; the flat ratio for services indicates essentially no productivity growth in this sector while the gentle decline for nondurables indicates only modest productivity growth.
The projections in figure 2 are based on the assumed path of ECI shown in figure 1 combined with flat paths for food and energy prices, consistent with flat or downward sloping paths in futures markets for corn, soybeans, petroleum, and natural gas.[7] For each PCE component, the projection is designed to gradually eliminate the gap between projected data and model fitted values by December 2024.
Durables prices rose well above the model predictions during the COVID-19 pandemic, as consumer demand for durable goods far exceeded the capacity to produce them.[8] The most important contributor to this pattern is the automobile sector. As has been widely noted, prices for new and used vehicles soared well above the costs of labor and raw materials during the pandemic owing to heavy demand and bottlenecks in the supply of semiconductors and other raw materials. Vehicle demand is likely to moderate with rising interest rates while semiconductor production is rebounding, which should enable automobile prices to return to a more normal margin over costs. Used vehicle prices have already fallen in recent months.
The projection for overall PCE inflation through 2024 in figure 1 is constructed as a weighted average of the PCE components shown in figure 2.[9] After peaking at 6.5 percent in March 2022, the 12-month PCE inflation rate is projected to decline to 5.3 percent by December 2022, 2.9 percent by December 2023, and 2.4 percent by December 2024. These results are similar to the projections of the Survey of Professional Forecasters.
In light of the unprecedented errors in forecasts of inflation over the past year, any projection of inflation in 2023 must be viewed as especially uncertain. It is possible that food and energy prices will decline or that wages will grow more slowly than projected here, pulling inflation down even faster. But risks in the other direction seem larger, as the Fed's rate hikes have so far barely touched the red-hot labor market, high inflation may start to feed into wage demands, and price-cost margins may not return to previous trends. Nevertheless, overall inflation is likely to drop more rapidly than the pace of wage increases in 2023, as commodity prices cool off and supply bottlenecks ease.
Notes
1. Furman and Powell focus on core PCE inflation, which excludes food and energy prices. Because these prices are expected to decline in coming months, overall inflation is likely to fall faster than core inflation.
2. The results displayed in column 4 of table 3 in the linked paper show that ECI grows at a long-run rate of 2.9 percent when unemployment remains at its equilibrium rate. The speed of adjustment to this rate is fast, with 69 percent of the adjustment to the long-run rate occurring immediately. The ECI grew at a pace below 3 percent during the 10 years prior to 2019, consistent with an unemployment rate above its equilibrium level.
3. Data are from Consensus Forecasts, November 2022. Annual average ECI growth in 2023 of 4.3 percent would be consistent with a pace of 4 percent or a bit less on a Q4/Q4 basis if ECI growth slows gradually over the coming months.
4. 12-month growth rate of ECI for all private industry workers. Monthly data (in levels) are interpolated from end-of-quarter observations.
5. A key risk to this projection is the possibility that continued high inflation would push up wage demands directly. So far there is little evidence of cost-push wage inflation, and the rapid decline in projected inflation should help to prevent such inflation in the future.
6. The regression starts with the first available observation of ECI in March 2001 and ends just before the COVID-19 pandemic in February 2020. Energy price is the PCE energy category. Food price is the producer price index for finished consumer foods. (The PCE food category includes a large amount of labor costs in the restaurant and grocery store sectors.) We tried including the producer price index for unprocessed materials excluding food and fuel, but its coefficient was small and usually had the wrong sign; its inclusion made little difference to our results.
7. Futures prices are from the Chicago Mercantile Exchange Daily Information Bulletin as of December 1.
8. A shift in demand between sectors is inflationary—even if total demand is unchanged—when sectoral supply curves are nonlinear with a steeper slope as output increases. Evidence suggests that aggregate supply (Phillips) curves are nonlinear in precisely this way, consistent with the view that bottlenecks are especially inflationary.
9. Weights are assumed to remain constant at their last observed values through the projection period. The weights are services 65.4 percent, nondurables 22.2 percent, and durables 12.4 percent.
Tags
Who is online
117 visitors
Wages are going up as inflation is being tamed!
Not so fast there....and gas is starting to creep up again.
Kiplinger's Inflation Outlook: Easing, but Core Still High | Kiplinger
The Fed's favorite inflation gauge just heated up — and that could mean another rate hike | CNN Business
Inflation Has Eased, but Economists Are Still Worried - The New York Times (nytimes.com)
Should we start worrying about corporate balance sheets ?
/s
Wages are growing, unemployment is at record lows, inflation is abating, business are raking in record profits, but to hear the NT far rightwing nabobs of negativity tell it, thing are terrible...
Where? In Moscow and St Petersburg Russia?
Biden is fucking with Russians like a machine.
A one man wrecking ball fucking up Russians...
Butt, here in the US of A things are looking up!
[Deleted]
Seems 34% of America begs to differ with you. As would anyone with more than two brain cells to rub together.
And if wages are going to grow, we have to dig out of the deep assed hole we got put in over the last year at least.. You do realize I hope that inflation numbers are a year over year comparison. So that means that last June at 7+% will be the barometer for this June's numbers. Not pretty. That means we LOST 7+% in buying power last year so if the inflation rate is at 4% say, we are STILL 11% (less actual wage growth) higher than May of last year.
You're not the one that presented the 34% fact, that was Jim. All you offered was a 2 line comment that basically your same old song and dance
Oh good grief. You never made a typo in your life did you?
I'm not getting into a pissing contest with you. If you've made typos then don't be so goddamn quick to ride somebody else's ass about it.
Please have the last word because I'm done with this conversation
Biden could cure cancer, and the Usual Suspects would criticize. They operate on the principle that if they lie loud enough and often enough, surely someone will be convinced...
THAT is bullshit and you know it. You did the same yesterday........................and looking at my keyboard, the D and J (which would be referencing JJ) aren't even close or typed with the same finger.
Obama tapped him to do just that. How is that working out 8 years later?
JBB, I love ya...but I just can't agree with this seed. I'm not getting any kind of a raise this year and I don't see inflation abating all that much. Gas is still hovering at $3 to $3.20 a gallon. Food prices are still very, very high. Utilities aren't going down, either.
I don't think prices are going to go down at this point. It always makes me shake my head when they don't include food or energy in their stats when that is what people have to deal with the most.
Mr G went grocery shopping a couple of weeks ago. We don't do a lot of shopping often, maybe once a month, but he tried to keep it under 600. Almost, but then he had to tip the bagger. We eat a lot of meat and that's what makes it really expensive
The average monthly grocery bill for a family of four is nothing near $600.00.
Did the $600 include liquor, beer and wine?
Nope! Meat! Canned goods! Frozen goods! Potatoes! Onions!
We don't drink wine or liquor. And we don't shop for a family of four since it's only two of us now. We shop so we're not constantly running to the grocery store to find something for dinner.
About $100 a week is what most spend...
What are they eating? Hamburgers and hot dogs? We like to cook so we get good cuts of meat to cook
I spent around 400 the last couple of times. Two months in a row it was that much.
One thing I want to invest in is one of those air vacuum sealer bag things. Keep things frozen better.
See? And you're buying for one.
Nope, we eat like kings. Find an ALDI...
The only freezer here is the one in the side by side so I buy meat once weekly. I buy mostly boneless white meat, 85/15 burger, cube steaks and pork chops though because good steaks are really expensive. I don't skimp on groceries...
I do not purchase much processed stuff.
$400 a month is normal. $600 per week should feed all the Duggers in Arkansas!
I actually don't mind the cube steaks if they are cooked right. On my last outing at the river, on the sandbar there was people grilling out. I noticed what they were cooking looked like this long thin flank steak. I guess it was cheaper.
I could have spent more. Haha
I wouldn't mind having a whole turkey in the freezer.
My Chicken-Fried Steak is "To Die For"...
The trick is hot grease for "Not too long".
And, gravy...
I like my Kroger. I don't live in the big city.
Those prices are too volatile for making policy. Excluding them makes inflation more understandable. There's a lot of discussion right now, among economists, about the best way to measure inflation.
Making good policy depends on knowing what's going on. That means good instruments for measuring. Output must not be too noisy.
Sorry, but I did not write the article and personal anecdotes do not trump the national statistical data which shows that wages are growing and businesses are profiting and unemployment is practically nonexistent and inflation abating...
My retirement income is up about 10% YTD.
Covid supply chain issues and Putin's war in Ukraine caused worldwide price increases due to the laws of supply and demand but overall we are doing better than about any other countries, our economy is growing and we recovering quicker than other countries...
I read that many red states are falling behind.
Maybe the fault is Sarah Huckabee Sanders'...
There's no maybe about it, Hun. I won't go into it here, but she fucked everybody over
What this says is that inflation is projected to go down NEXT year. Doesn't help us a lot this year and experts are only expecting COLA next year to increase 2% or less. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been in decline so SS and VA recipients might actually get no increase at all next year.
Also I just came across the White House press release on this and it's absolute partisan garbage fodder taking credit for all the economic good news. Biden, as all presidents, gets little to no credit for the short term ups & downs of our economy. The thing driving all the good news lately is consumer spending. As a nation we have been collectively spending like drunken sailors on shore leave... even through the inflation. Obviously the interest rate hikes are taking their toll and working to slow that spending, but people didn't just cut up their credit cards and kill their Amazon accounts. We are all still going out to eat, seeing movies and buying cars. Housing prices are still up because there are still so few houses in many markets too.
Thanks for explaining all that to me
It's why some economists predicted a recession, but that hasn't and doesn't look likely to happen, because unemployment is still at historic lows and spending continues to be robust. It's really the spending propping up the economy at this point and that doesn't look to slow down too much either. For a while it was driving inflation, but now inflation is slowing as the interest rate increases are finally working on credit for housing and cars.
Yes, sales are starting to slow, but not a lot because there are just no new listings in most markets. I don't see a housing market crash anytime soon either. I was talking to the Kia sales guy not long ago who sold me my car. He says inventory isn't as bad as it was last year, but still not as good as pre-pandemic levels and they don't keep new cars on the lot very long.
The whole idea of raising the interest rates so high is to get people to buy fewer and fewer homes slowing inflation. That's working.
I can't say for every market but around here it looks like most people selling are retirees that are moving to warmer climates.
I've also talked to multiple people now who can't find 3 and 4 bedroom homes and would jump at any listing. This is going on at the same time a developer just informed a bunch of renters they will have to move because they are converting those units to luxury short term rentals. The city was pissed and looked into pulling back grants they got, but couldn't do it, then changed rules for future grants.
In general rent prices here are insane... It may even still be cheaper to buy than rent? That is if one can find a home.
I suspect all of those spending trends will continue until we start to see some actual unemployment.
Not just homes.
High interest rates are designed to slow borrowing of all sorts, thus slowing the creation of new money and economic growth.
Because Trump and the gop had pulled out all the economic stops (cutting taxes, increasing spending on the military and covid stimulus, keeping interest rates artificially low) during relatively good economic times there was nothing left to do except suffer the repercussions of more difficult economic conditions...
So far things are better than expected!
Of course. Wasn't that supposed to happen last fall? Unemployment looks stable at the moment. There have been employment corrections in some markets, but not enough to make a meaningful impact.
Yes. We are all aware. It's just now starting to work as the FEDs didn't raise rates again the last time they met. Inflation has been slowing - the point of the article.
I realize this will shock you, but math and economics are slightly more intricate than "Trump bad".
You might actually seek to understand them just a little before you post.
You and I may be aware.
You dont need to read very many posts to see that not all of us here on NT share that awareness. TBF, unless it is something a person was taught, they would have no way of knowing.
Political die hards almost always lack some form of basic understanding about how the world actually works. A little education may help them develop more realistic views.
Yeah, I think so. And as we agree, it's about way more than just housing.
That said, housing is still one of several significant systemic issues that are going to continue to keep inflation well above Fed targets. Wage inflation is another.
A lot of this is very 1978, and is driven by a lot of the same demographic patterns.
I was 12 in 1978. There were some stellar movies that came out that year! Dawn fo the Dead, Invasion of the Body Snatchers, John Carpenter's Halloween, Grease, Superman...
As was I.
I remember a bidding war on my parent's house because they had an assumable mortgage.
It was 9.5%.
That was at the time my grandparents were getting 12% interest on savings accounts...
If you knew anything about economics you would know that what i said is all true!
My degree was in economics and business.
Did you study economics at coach college?
It's absolutely not. Trump had zero ability to keep interest rates anywhere. No president does.
Did he spend money like a drunken sailor on shore leave? Yes. Has Biden spent money like a senile grandpa trying to spoil 150 million grandkids? Also yes.
You're constant political bias is idiotic, ridiculous, and indefensible with even a passing investigation of the math or science involved.
I was about to call bullshit. But then I remembered that AOC was also supposedly an Econ major, and she doesn't know how the unemployment rate is calculated. So I guess anything is possible. So at your college, did they teach you that the president controls interest rates? If so, you should ask for your money back.
Well-educated people rarely succumb to brainless political bias.
I studied mathematics and minored in education and pedagogy, which means I took real Calculus and real Statistics instead of that bullshit they teach the business majors.
Wrongo Jack! The ways a government can stimulate economic growth are by cutting interest rates, cutting taxes and increasing to spending. Because rates were cut basically zero, taxes were cut to the bone and spending was unchecked during good economic times under Trump's government and the gop congress there were none of those normal tools available to stimulate our economy when Covid-19 and Putin's War in Ukraine sent the world's economy into decline. If you had studied economics you would know that all of this is correct...
You cannot belittle my understanding of economics while simultaneously sneering at the actual science of economics. As you did!
SMH!
Trump's over three trillion dollar budget deficit in 2020 says you are wrongo, too!
No, because Trump was already running three trillion dollar deficits each of his last two budget years (2020 and 2021) additional tax cuts to stimulate our economy are not doable and would be incredibly irresponsible. As irresponsible as it was for the gop Congresses to cut taxes in 2017 and 2018 when unneeded!
Do at least attempt to read carefully.
I specifically referenced interest rates.
Explain how the POTUS has the ability to "keep interest rates artificially low."
We can skip to the end of that story.... they don't. The Fed is independent by design.
Well educated people are not blindly partisan.
If you actually understood 1/10th of what you claim you wouldn't continually embarrass yourself by pretending the party who have spent more time in control of spending somehow bear no responsibility for its effects.
You quibble on one point while ignoring everything else. You must have slept through the entire Trump administration!
The irony of you with your hyper-partisan foolishness accusing any human anywhere of ignoring anything is utterly fucking hilarious.
But thank you for acknowledging your error.
From the person who can't seem to remember any of the $5+ trillion new Biden spending.
You really do have quite a knack for accusing others of sins while you commit them yourself more egregiously.
You make no points with personal attacks!
Once again...
As we were already spending like drunk sailors on shore leave and had already cut taxes to where we were already running three billion dollar deficits and since interest rates were already effectively zero under Trump and before Covid during a booming economy none of the normal tools that normal governments normally use to stimulate economic growth were available to us when the world economy crapped out. That was my original piont which is 100% accurate. So, who is really the one being blindly partisan here?
It is bad enough you impersonate The World's Greatest LGBTQ Expert but now the high school coach who who never studied economics butt knows more about economics than any economists.
Who ridicules the science of economics.
That Guy!
Nicely done!
A great point for you to remember.
You pretend Covid was a "normal" situation with a normal economic downturn instead of a once in a century black swan event that shut down economies all over the world.
You also pretend the US didn't fare much better than most other developed nations.
You also pretend Trump had anything at all to do with policy. We're talking about the same asshole who thought he could "renegotiate the national debt"... like it was a real estate loan.
You proceed to pretend that Biden's $5 trillion+ in new spending plus another several hundred billion in loan deferrals didn't throw gasoline on the fire, and that he hasn't intentionally extended the Covid national emergency period so he could keep giving out money.
Economics is very difficult. Difficult to manage and difficult to measure. And the President has relatively little power over the economy - much less than the chairman of the Fed.
Statistically, the US is doing relatively well, compared with other advanced economies. That's not much consolation for people who are hurting... but it's true.
As usual, most of the nation’s economic product is being captured by the already-rich, but that's really not something that Biden can correct. (I wish, but sadly, no.)
Imagine how much more sane our country would behave if everyone knew this.
That said, the Fed Chair his pretty significant power over the economy.
For emphasis.
You know what would make this an actual accomplishment? If inflation hadn't gotten to 9% in the first place. But it went there eliminating any chance of this being an accomplishment. Even remotely