Moody's Economist: 'We Need More Wage Growth' for Higher Inflation

Friday, 01 Aug 2014 07:07 PM

 

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The U.S. Federal Reserve has made a big bet that recovery of the labor market is a long way from creating a worrisome surge of inflation. A range of economic data on Friday suggested the Fed has been reading the odds well.

While the Labor Department's monthly employment report showed more than 200,000 jobs created for the sixth straight month, wages were about flat in the private sector and there was little improvement in America's blight of long-term unemployment.

The report supported Fed Chair Janet Yellen's view that a sharp drop in the unemployment rate over the last year has masked substantial weakness in the labor market. That could give Yellen room to keep interest rates at rock-bottom levels well into next year — without inflation becoming a threat.

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"We need more wage growth to see a pickup in inflation," said Ryan Sweet, an economist at Moody's Analytics in West Chester, Pennsylvania.

American workers, on average, earned $24.45 an hour in July, up only a penny from June. Over the last year, wages have grown just 2 percent, in keeping with where they have been stuck since late 2009. Before then, hourly earnings typically rose 3 percent or 4 percent a year.

One reason to be pessimistic about wage growth is that more workers appear to be searching for jobs.

The Labor Department said more than 300,000 Americans joined the workforce last month. That was the main reason the jobless rate ticked higher to 6.2 percent, and economists generally think a larger pool of labor will make raises harder to come by.

"Yellen can argue that there are still few signs of tightness in the labor market," said Jim Kochan, a market strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.

The added workers in the labor force left a larger share of the population either employed or looking for work, pushing the so-called labor force participation rate higher to 62.9 percent.

Even though an aging population should be pushing the participation rate lower, it has been largely stable this year, suggesting more workers are restarting job hunts that were put off when the job market was more dire.

Just because individuals are seeking work does not mean they will find it anytime soon. The number of people unemployed for more than 26 weeks actually increased slightly in July to 3.1 million. Measured as a share of the workforce, the long-term unemployment rate held steady at 2 percent, more than twice its levels in 2005 and 2006.

The Labor Department also said a broader measure of unemployment increased slightly to 12.2 percent in July. This measure, known as the U-6 jobless rate, includes workers who would like a job but are not actively seeking one. The ranks of these workers increased in July, another example of ongoing slack in the labor market.

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