Historically strong wage growth is a ‘double-edged sword’ that could worsen inflation, GOP Sen. Kennedy says

Sen. John Kennedy, R-La., speaks to reporters on Tuesday, May 21, 2019, on Capitol Hill in Washington

The strong wage growth seen through 2021 is a “double-edged sword,” Republican Sen. John Kennedy told Insider.
With supply chains far from healed, soaring pay could keep inflation high, he added.
Kennedy expressed interest in working with the Fed on a way for Congress to fight inflation.

Pressure on businesses to raise wages amid the historic labor shortage is giving workers a huge boost. But it also risks keeping inflation permanently high, Republican Sen. John Kennedy of Louisiana said Wednesday.

The latest jobs data suggests the labor shortage is here to stay. Job openings totaled a historically high 10.6 million in November, and December’s payrolls report showed job creation slowing again at the end of 2021. Several factors, ranging from the Omicron variant to childcare expenses, have been blamed for the shortage, yet Democrats including President Joe Biden urged businesses to raise pay if they want to attract workers.

Many firms did just that. Wage growth boomed through 2021, giving workers some of the biggest raises in recent memory. The boost is a welcome one after decades of weak growth, but with the economy still sorting out its supply-chain mess, driving pay higher poses risks as well, Kennedy told Insider.

“The wage pressure is a double-edged sword,” he said. “For the working men and women of America, it’s a good time. But when your supply chains are kinked like ours are, and you have the federal government spending so much money, that creates inflation pressure.”

That inflation has completely eroded most of the pay gains workers enjoyed last year. Only leisure and hospitality workers experienced real wage growth in 2021, with all other sectors’ average wage gains falling short of overall inflation. Put simply, most workers are “still losing money every time [they] go to the grocery store,” Kennedy said.

To be sure, signs point to the supply-demand gap starting to close. Retail sales crumbled 1.9% in December, handily outpacing the forecasted decline of 0.1% and hinting at a major pullback in consumer demand. At the same time, key indicators of the supply chain’s recovery show inventories rebounding, order backlogs shrinking, and production picking back up through the end of 2021.

Federal Reserve Chair Jerome Powell has also pushed back against fears that rising pay will spark a vicious cycle of surging inflation. Wages “are not a big part of the high inflation story that we’re seeing,” the chair said in a December 16 press conference, adding it’s “unclear” when the labor shortage will end.

A handful of Senate Republicans introduced a bill earlier in January that would ban any fiscal spending that’s estimated to drive inflation above 4.5%, but Kennedy expressed some doubt toward the idea on Wednesday. Lawmakers should instead consult the central bank for ways to stave off more price surges, Kennedy said.

Though economic projections published by the Fed in December hint it will raise interest rates three times in 2022, they aren’t binding. The speed at which the central bank reins in its emergency policy to fight inflation remains uncertain. 

“You can’t cap [inflation]. You’ve got to kill it,” Kennedy said of the proposed 4.5% inflation limit. “We know the Fed is going to do something. I would like to be able to sit down with the Fed and say, ‘Is there something we could do?'”

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Economy, Markets, Politics, Economy, John Kennedy, Senate, senate republicans, Inflation, Wage Growth, price growth, Wages, Federal Reserve

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