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U.S. workers are getting bigger paychecks back home as employers pay to attract and retain employees. But the same people are pushing more for furniture, food and many other goods and services these days.

It is not yet clear which side of the equation – higher wages or higher prices – will win, but the answer could have major implications for the Federal Reserve and the White House.

There are a few ways in which this moment can evolve. Wage growth may remain strong, driven by a tight labor market, and overall inflation may simmer down as the supply chain narrows and an increase in demand for goods declines. It would benefit the workers.

But worrying results are also possible, and high on the list of concerns is what economists call a “wage-price spiral.” Employees can start demanding higher wages because they have to keep up with the rising cost of living, and companies can pass on these wage costs to their customers, starting a vicious circle. It could make today’s rapid inflation last longer than politicians expect.

The stakes are high. What happens to wages will affect families, businesses and central bankers – and the way forward is far from certain.

“That’s the trillion-dollar question,” said Nick Bunker, research director for recruitment site Indeed.

Accumulated change in wages and salaries in the employment cost index from 2016

For now, wage growth is fast – just not fast enough to keep up with prices. One way to measure dynamics is through the Employment Cost Index, which is reported by the Labor Department quarterly. In the year to September, the index’s target for wages rose by 4.2 per cent. But an inflation gauge that tracks consumer prices rose 5.4 percent over the same period.

Another wage target, an index that tracks hourly wages, rose faster than inflation in August and September after lagging after most of the year.

And an update of the gauge released in the jobs report on Friday is expected to show that wages rose 0.4 percent in October, which is roughly in line with recent monthly price increases. But hourly wage data have been distorted by the pandemic because low-wage workers who left the labor market early in 2020 are now re-entering and moving the average around.

The result is that the tug of war between price increases and wage increases has not yet turned decisively in favor of the workers.

Whether wage increases ultimately darken inflation – and why – will be crucial for economic decision-makers. Central bankers celebrate rising wages when they come from productivity gains and strong labor markets, but would worry if wages and inflation seemed to egg each other up.

The Federal Reserve is “watching closely,” for a worrying rise in wages, its chairman, Jerome H. Powell, said Wednesday, though he noted the central bank did not see such a trend shaping up.

Recruiters report some early signs that inflation is taking wage decisions into account. Bill Kasko, chairman of Frontline Source Group, a job placement and staffing firm in Dallas, said that as gas prices in particular rise, employees are demanding either higher wages or the opportunity to work from home to offset their increased commuting costs.

“It will be a topic of discussion in wage negotiations,” Mr Kasko said.

But for the most part, today’s wage increases are linked to another economic trend: red-hot demand for workers. There are many job vacancies, but many potential employees remain on the labor market side, either because they have chosen to retire early or because childcare issues, virus issues or other considerations have kept them from working.

Emily Longsworth Nixon, 27, and from Dallas, is one of Mr. Kasko’s employees. She tried to recruit a woman for an executive assistant position at a technology company that would have given her a $ 30,000 raise – and saw the candidate walk away for a counter-offer with no additional pay but three work-from-home days each week.

“Then I had the tail between my legs for a few days; I had never thought to ask about that, ”she said, adding that employers need to know their graduates like never before, as workers strain their power, take home pay rises and other perks. “Before Covid, it was an employer-driven market.”

These in-demand workers may end up being better off in the long run if their wages continue to toughen higher, even as supply chains heal and prices of used cars and sofas moderate, allowing them to afford more.

Wage gains may also become more sustainable for employers as virus worries subside and employees flow back from the labor market sidelines.

And even if rapid wage increases continue, it is not absolutely the case that employers will be forced to raise prices drastically. Companies could belly a hit to their profits instead, or they could invest in technology that improves employee productivity.

If fewer waitresses can sell the same number of dinners because customers order from QR codes, for example, employers will have room to pay more without hitting their bottom line.

But a happy result is not guaranteed. If today’s high prices drive tomorrow’s wage negotiations and set in motion an upward spiral, the result could be a longer period of high inflation that causes the Fed to raise interest rates to dampen demand and cool prices down, slowing the economy and possibly even sending it back. in a recession.

A scenario like this has not taken place since the 1970s and 1980s. But a situation like pandemic shutdown and subsequent reopening has never happened.

“We have not seen a wage-price spiral for decades, but we have not seen inflation like this for decades,” said Jason Furman, an economist at Harvard University and former economic adviser to the Obama administration, calling the possibility of a wage-driven spiral ” an open question. “

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