The wild card in the Fed’s inflation gambit: Morning Brief

#inflation #fedpolicy #labormarket Yahoo Finance’s Brian Sozzi, Myles Udland, and Javier E. David discuss Fed policy and inflation. This article first appeared in the Morning Brief. Get the Morning Brief Monday, June 28, 2021 With inflation no longer Greenspan's 'q' word, here's why generous worker pay matters. Does anyone remember the word “quiescent”? It’s an economic catchphrase popularized by Alan Greenspan, the former Federal Reserve chairman who presided over an impressive run of strong growth and stable inflation. During his lengthy tenure, the central banking éminence grise invoked “quiescent” to describe stable prices — mostly attributed to a mix of technology, high productivity and globalization — in the face of comparatively strong growth. He was also notoriously hawkish on wage-driven inflation (his broadsides against minimum wage hikes earned him the enmity of left-leaning economists). With price pressures percolating everywhere, one wonders what the now-nonagenarian must think about the current economy and Fed policy, particularly in light of an acute worker shortage that’s prompting employers to hike wages. On Friday, some data shed light on a dynamic that could complicate the Fed’s delicate act of navigating the Scylla of a scarred labor market, and the Charybdis of rising prices. Namely, workers are (finally) reaping bigger paychecks. May’s personal consumption figures were largely in-line with expectations, but showed wages and salaries posting another consecutive month of gains. Separately, the University of Michigan's Consumer Sentiment Index dipped in June, but 32% of survey respondents in the top third income bracket saw their pay rise — and a small number expect to earn even more in the year ahead. A defining characteristic of the post-pandemic labor market is that workers have, to some extent, recouped lost bargaining power. For better or worse, workers are holding out for fatter paychecks, demanding more flexible work arrangements — or just quitting their jobs altogether. Previously, “the worker did not have that ability to command higher wages ... because we didn't have much in the way of broader inflation,” Kevin Flanagan, head of fixed income strategy at WisdomTree, explained to Yahoo Finance in a recent interview. “Now we’re looking at a broader swath of when consumers have to pay more [and] now you can see the changing dynamic of workers trying to command higher wages,” he said. “And that’s the concern: If you start throwing wages into this mix, then the Fed will have an inflation problem.” On one hand, higher pay is welcome news to cash-strapped workers. For years, stagnant wages amplified the searing debate over wage inequality, and were mostly responsible for eroding support for globalization and free trade — two of Greenspan's economic shibboleths. Yet as Harvard economist N. Gregory Mankiw once pointed out: “When expected inflation is high, workers demand larger wage increases. Employers acquiesce, expecting that they can pass higher costs on to consumers. As a result, high expected inflation leads to rapid cost escalation, which in turn leads to high actual inflation.” The “coiled spring” of pent-up demand is sending prices everywhere on a tear (even wings and chicken sandwiches haven't been spared). With ample evidence suggesting that companies are hiking prices as the economy booms, consumers are literally eating higher wages and supply costs. There’s simply no telling when or how it will end. All of which suggests the Fed’s gambit is flying in the face of the anti-inflation doctrine inculcated by Paul Volcker, Greenspan’s predecessor and the man credited with slaying the “dragon” of double-digit inflation. Fast forward several decades, and some Wall Street economists are calling out the Fed for being asleep at the wheel on soaring prices. For more on this article please visit: https://finance.yahoo.com/news/the-wi... Subscribe to Yahoo Finance: https://yhoo.it/2fGu5Bb Yahoo Finance Plus: With a subscription to Yahoo Finance Plus get the tools you need to invest with confidence. Discover new opportunities with expert research and investment ideas backed by technical and fundamental analysis. Optimize your trades with advanced portfolio insights, fundamental analysis, enhanced charting, and more. To learn more about Yahoo Finance Plus please visit: https://yhoo.it/33jXYBp Connect with Yahoo Finance: Get the latest news: https://yhoo.it/2fGu5Bb Find Yahoo Finance on Facebook: http://bit.ly/2A9u5Zq Follow Yahoo Finance on Twitter: http://bit.ly/2LMgloP Follow Yahoo Finance on Instagram: http://bit.ly/2LOpNYz Follow Cashay.com Follow Yahoo Finance Premium on Twitter: https://bit.ly/3hhcnmV