Labor costs (wages and benefits) increased in 2021 in the United States at the fastest rate since 2001. Labor shortages in many sectors forced employers to pay 4% more than the previous year, in a labor market hard fought and subject to pressures such as the Great Renunciation, the massive abandonment of workers from the labor market at a rate of four million people a month, and the increase in the cost of living. In addition, consumer spending fell in December, due to the rebound in covid-19 cases and congestion in supply chains.
Inflation was climbing month after month in the final stretch of 2021, reaching 7%. And despite the fact that international institutions and analysts believe that its effects should moderate, they also warn of the danger of high inflation persisting in the United States if companies are forced to make their products and services more expensive to compensate for rising labor costs. . The employment cost index, an indicator that collects the compensation of workers that the Federal Reserve (Fed) closely follows, increased 1% in the last quarter of 2021 compared to the previous year, somewhat less than forecast by the experts (1.2%). In the year as a whole, the indicator rose 4%, according to data published this Friday by the Department of Labor.
Wage costs contribute significantly to price increases. And today’s tight job market, with more supply than demand (10.6 million openings at the end of November), is encouraging many workers with bargaining power to change jobs and demand higher pay, increasing the risk of a destabilizing inflationary dynamics known as the spiral of prices and wages, a vicious circle in which the rise of one of the indicators puts pressure on the other, and vice versa.
Although the labor market contracted in early January due to the impact of the omicron variant of the coronavirus, it is close to full employment, despite the fact that the US economy has only recovered 84% of the jobs it had before the pandemic: in December the unemployment rate was 3.9%, very close to the 3.5% prior to the health emergency. Data from the Labor Department indicated Thursday that initial claims for jobless benefits fell by 30,000, to a seasonally adjusted 260,000, in the week ending Jan. 22.
The Fed’s favorite unit of measure for inflation is the core personal consumer price index, or core inflation – discounting volatile food and energy prices – which rose 0.5% in December and a total of 4.9% in 2021, compared to 1.5% the previous year. The standard reading of inflation, that of the consumer price index (CPI), reached 7% in December compared to the same month of 2020; the highest figure since 1982. Wages also increased rapidly, but not enough to keep up with rising inflation. Average hourly wages increased 4.7% in December from a year earlier, according to the Labor Department.
Both inflation and wage growth remained elevated at the end of 2021, setting the stage for a year in which the Federal Reserve and the White House will try to maintain momentum in the labor market, close to full employment (a 3 .9% unemployment in December, very close to the 3.5% prior to the pandemic) while struggling to control the escalation of prices, to which the problems of shortages caused by the great global jam in the chains of supply and energy crisis, fueled by the Ukraine crisis. The sum of both trends, rising inflation and wages, can push the Fed to raise rates several times throughout the year. The great challenge is to stop the rise in prices without damaging the labor market.
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