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US Faces Tough Scenario if Inflation Takes Off and Salaries Lag

US Faces Tough Scenario if Inflation Takes Off and Salaries LagUS Faces Tough Scenario if Inflation Takes Off and Salaries Lag

Prices and wages have been slow to accelerate throughout the US economic expansion, surprising economists. Now, a new conundrum threatens to emerge: Faster inflation accompanied by more of the same paltry growth in pay.

“Broad-based wage gains, in our business at least, they’re just not going to happen,” Troy Taylor, chief executive officer at Coca-Cola Beverages Florida, said during a conference at the Federal Reserve Bank of Dallas last week. The company will pay for some skilled workers, but will otherwise increasingly turn to technology to fill its production needs, he said, Bloomberg reported.

 “As businesses do get more pricing power, because we will, what happens to that segment of the population that cannot get a wage gain?” he asked.

It’s a key question for US central bankers, and is one reason to keep the pace of rate hikes slow and steady even as inflation converges to fed policymakers’ 2% goal. Unemployment is at a 17-year low, but if something has changed that structurally prevents low joblessness from yielding higher pay—be it new technologies, stubborn slack in the labor market, or a coming rebound in capital spending—the contours of the economy could be totally different.

Without sustained pay increases, it could be tough to fuel the strong spending needed to sustain demand-based price gains. Or, if higher pay accrues only to skilled, in-demand workers, the Fed could have a dramatically two-speed economy on its hands—one in which affluent employees enjoy fatter paychecks and spur growth even as workers with less skill and experience increasingly lag behind.

Wages have been rising, but progress has been slower than fed officials expected. The employment cost index, a measure of both pay and benefits, increased 2.7% in the year through the first quarter, the largest advance since 2008 but well below the above-3% readings that were common prior to the last crisis. Annual gains in average hourly earnings, another closely-watched measure, have been oscillating around 2.5%—up since the crisis, but down compared to historical norms.

Michael Feroli, chief US economist of JPMorgan Chase & Co. in New York, expects both earnings and prices to move up gradually. But if inflation took off without paychecks leading or following suit, he said “it would complicate the situation.”

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