Fed may end up with an inflation problem on rising wages

(Reuters) – Wages may be growing at a faster clip than envisaged by U.S. policymakers, with a recent raft of business surveys showing an increase in the number of companies raising compensation.

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One closely watched wage growth measure, a gauge produced by the National Federation for Independent Business, has reached a seven-year high. A turn in this index, which began moving up late last year, historically has been followed by a pick-up in wage growth nine months later.

That and evidence of a tightening labor market has some economists worried the Federal Reserve may miss the signs of accelerating wage growth and end up with an inflation problem.

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“The biggest threat to the Fed’s policymaking is that six years of not having to deal with wages doesn’t allow you to understand how wages will change when you come back to a more normal full-employment type of economy,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

“When the dam breaks, it breaks and you don’t necessarily see a slow rise in compensation.”

Fed Chair Janet Yellen told Congress last week she would keep monetary policy loose until hiring and wage data show the lingering effects of the financial crisis are “completely gone.”

“While rising compensation or wage growth is one sign that the labor market is healing, we are not even at the point where wages are rising at a pace that they could give rise to inflation,” she said.

But some economists are skeptical.

The NFIB gauge is closely correlated with the government’s employment cost index, a broad measure of wage growth and one of Yellen’s favorite indicators.

These economists expect the ECI to start pushing higher in part thanks to a narrowing of the gap between the unemployment rate and a broader measure of labor market slack, which includes people who want a job but have given up searching and those working part-time because they cannot find full-time jobs.

The unemployment rate is near a six-year low of 6.1 percent, while the so-called U-6 measure reflecting the broader band is at 12.1 percent. Both have come down from peaks of 10 percent and 17.2 percent respectively.

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While average hourly earnings, the most widely quoted measure of wages, shows tepid growth, compensation is quickening in areas such as financial services, mining, information and trade as well as transportation and utilities.

The Fed’s latest Beige Book found that while wage pressures were modest in most districts, they were rising in sectors such as construction and energy, where employers were struggling to find qualified workers. It said increases in the minimum wage in some parts of the country were also pressuring wages.

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