Rapid wage growth has not been an important driver of inflation, according to a new analysis published by the Federal Reserve Bank of San Francisco.
The recent run-up in the employment cost index, a measure of wages favored among economists and policymakers, “explains only about 0.1 percentage point” of the three percentage-point increase in consumer price inflation excluding food and energy, San Francisco Fed economist Adam Shapiro said in an article published Tuesday on the bank’s website.
“This leaves open other explanations for the high correlation between labor-cost growth and inflation. For instance, recent evidence shows that wage growth tends to follow inflation, as well as expectations of future inflation,” Shapiro wrote.
“Overall, the results highlight that recent labor-cost growth is likely to be a poor gauge of risks to the inflation outlook.”
Shapiro analyzed the relationship between changes in the employment cost index and nonhousing services prices, a category that policymakers including Fed Chair Jerome Powell have singled out as key for the inflation outlook, finding only minimal pass-through.
At the central bank’s last policy meeting earlier this month, “participants emphasized that core nonhousing services inflation had shown few signs of slowing in the past few months,” according to meeting minutes published May 24. “Some participants remarked that a further easing in labor market conditions would be needed to help bring down inflation in this component.”