- Businesses across the U.S. are broadening pay hikes as inflation continues at its fastest pace in 40 years, but employees are still struggling to match their wages with rising prices.
- Nevertheless, wage hikes and a strong labor market may embolden U.S. Federal Reserve policymakers to get more aggressive on rate hikes, with a 0.50% interest rate increase at the next policy meeting on the cards, to tackle inflation.
One of the biggest risks when it comes to rising inflation is a wage-price spiral that goes out of control.
Prices go up so workers demand higher wages, which leads to higher prices ad infinitum.
For now, there are no signs that such a spiral is U.S. wages and prices is happening, but the trajectory is not good.
Businesses across the U.S. are broadening pay hikes as inflation continues at its fastest pace in 40 years, but employees are still struggling to match their wages with rising prices.
From retailers to airlines, hotels to food services, companies are boosting starting pay to attract recruits and offering company-wide pay increases to base pay to retain workers.
According to U.S. compensation analysis firm PayScale, 92% of U.S. businesses plan to increase employee pay this year, up from around 85% in 2021.
On Friday, a monthly payrolls report will provide fresh insight on the strength of the U.S. labor market, as well as the bargaining power of workers.
In the U.S., a high savings rate has seen workers slow to return to the labor force, since the start of the pandemic and those who are willing to go back to work, have been demanding higher salaries and better benefits.
Despite being badly battered by the pandemic, American airlines, already struggling under heavy debt loads, have been forced to announce pay increases for their employees after staff shortages forced thousands of flight cancelations especially during the peak holiday travel seasons.
Some companies like Starbucks (+3.22%) and Chipotle (+0.97%), where demand is relatively inelastic, have passed on the higher cost of labor to customers as justification to increase prices.
Whereas other companies have simply absorbed the increase in wages to squeeze margins.
But while wage increases are being touted, data from PayScale suggests that only 44% of companies are planning to give their employees wage hikes of over 4%, well below current U.S. inflation rate of 7.9%.
Wages are also starting from a relatively low base – with many U.S. firms barely paying their employees a living wage.
Nevertheless, wage hikes and a strong labor market may embolden U.S. Federal Reserve policymakers to get more aggressive on rate hikes, with a 0.50% interest rate increase at the next policy meeting on the cards, to tackle inflation.
