Sharp Increase in Wages Contributing to Growing Concern Over Rising Inflation: Economists

A customer, bottom, pays for goods while shopping at the Atlanta Farmers Market in Atlanta, on June 6, 2015. David Goldman, File/AP Photo

An increase in wages amid weak hiring is prompting concern among economists about growing inflation as businesses attempt to entice employees back to work amid the COVID-19 pandemic.

The Labor Department’s August jobs report showed the U.S. economy added a disappointing 235,000 jobs during the month, versus expectations of around 750,000, while the unemployment rate declined by just 0.2 percent to 5.2 percent.

However, the report also showed that wages continued to rise, with average hourly earnings increasing to 4.3 percent on a year-over-year basis, up from 4 percent a year ago, and jumping 0.6 percent on a monthly basis, double of what Wall Street had anticipated.

In an effort to counteract shortages and attract workers amid nationwide labor shortages and hiring difficulties owing to the COVID-19 pandemic, numerous companies, particularly those in the dining and hospitality sector, as well as small-business owners, are increasing pay for employees.

Last week, Walmart announced that it will raise the hourly wages for more than 565,000 of its store workers by at least $1, amid fierce competition among companies for skilled workers.

The world’s largest retailer said in a memo to staff that the move marks the third investment the company has made in salaries in the past year.

Low-price retailer Dollar General Corp. announced it’s offering a $5,000 sign-on bonus to drivers as it expands its private fleet, while rival Dollar Tree is offering a $1,000 sign-on bonus to ensure its distribution centers are sufficiently staffed ahead of the holiday season.

Target, CVS Health, and Walgreens Boots Alliance are just a handful of other companies that have all said they are boosting starting wages to $15 an hour.

However, economists fear that the sharp rise in wages versus a declining employment rate could contribute to increased levels of inflation, adding extra pressure on central bankers trying to steer their countries out of economic turmoil.

A worker pushes shopping carts in a Walmart parking lot in Irvine, Calif., on Feb. 5, 2021. John Fredricks/The Epoch Times

“The 5.2 percent unemployment rate and rapidly rising wages suggest building inflationary pressure that will ultimately lead to more hawkish policy,” Citigroup economist Andrew Hollenhorst wrote in a detailed analysis of the current jobs situation.

He noted that he expects federal officials to focus more of their attention on the high level of job openings and rising wages in the September meeting of the Federal Open Market Committee, as opposed to total payroll gains.

The U.S. Federal Reserve and many economists maintain that the recent spike in inflation is “transitory,” and merely reflective of the ongoing effects of supply chain breakdowns during the pandemic and shifts in consumer demand as more activities such as travel become safer again.

Still, it’s expected that the Fed will likely announce the tapering of its asset purchases in November and begin the process a month later, in an attempt to address building inflationary pressures.

Economic historian Niall Ferguson has warned that inflation could be repeating the trajectory of the late 1960s, which set in motion sustained high inflation in the following decade.

Speaking to CNBC on Sept. 3, Ferguson said that policymakers are now facing a new challenge in the form of rising inflation after responding to the COVID-19 pandemic in a manner similar to the 2008 global financial crisis.

He called into question the Fed’s statement regarding the “transitory” inflation spike, and noted that an “inflation liftoff would be a problem.”

“How long is transitory? At what point do expectations fundamentally shift, especially if the Federal Reserve is telling people, ‘we have changed our inflation-targeting regime and we don’t mind if inflation goes above target for a while?'” Ferguson said.

“My sense is that we are not heading for the 1970s but we could be re-running the late 1960s, when famously the Fed Chair then, McChesney Martin, lost control of inflation expectations.”

Reuters contributed to this report.