Economics: Wage inflation – frictional or structural?

Central banks are anxious about the potential for ‘second-round effects’

The risk that higher inflation feeds into wages is possibly central banks’ biggest fear right now. Even though unemployment rates remain above pre-pandemic levels in most economies, there are widespread signs of ‘tightness’ in labour markets.

The US has seen more labour market upheaval than others due to Covid

These signs are most acute in the US, where the Phillips and Beveridge curves appear to have shifted outwards. Differences in the pandemic policy response could explain why the US has seen a greater build-up of wage pressures than in Europe or Japan.

It’s unclear how quickly this will unwind, keeping the Fed on alert

Many of the shifts seen in the US labour market are likely to unwind, but the timeline for this is unclear. The Fed’s bias has already swung, and contrary evidence is unlikely to emerge before mid-year. By then, the funds rate will probably be 100bp higher.

Economics:  Wage inflation – frictional or structural?