Desperate to fill open positions, businesses are increasing pay to attract and retain workers, particularly at the lower end. But rising prices are eroding those wage advances. Inflation-adjusted average hourly earnings dropped 2.4% in December from a year earlier, the biggest drop since May, separate data showed Wednesday. However, compared with a month earlier, they rose 0.1%, the first gain in three months.
Shelter costs -- which are considered to be a more structural component of the CPI and make up about a third of the overall index -- rose 0.4% from the prior month. Other gauges of home prices and rents have surged last year, likely presaging a sharp acceleration in the report’s housing metrics this year and offering an enduring tailwind to inflation.
Omicron -- the dominant Covid-19 variant in the U.S. -- is poised to further disrupt already fragile supply chains as quarantines and illness prevent some employees from going to work. Spending on services like travel may slow, pushing down prices, but goods prices may move higher.
Nonetheless, the impact is expected to be temporary. Economists expect CPI growth to moderate to around 3% over the course of 2022, which will depend on supply chains normalizing and energy prices leveling off. However, higher rents, robust wage growth, subsequent waves of Covid-19 and lingering supply constraints all pose upside risks to the inflation outlook.
The persistently high inflation is also likely to maintain a high hurdle for President Joe Biden and Democrats to revive their roughly $2 trillion tax-and-spending package, after a key lawmaker, West Virginia Senator Joe Manchin, objected to the legislation in part because of the surge in prices.
On a December-December basis, the increase in the CPI was the largest advance since 1981.
The inflation environment changed markedly in 2021 compared with the prior year when a pandemic-related slowdown in demand led to the smallest calendar-year gain in the CPI since 2015.
--With assistance from Kristy Scheuble, Olivia Rockeman, Cécile Daurat, Liz Capo McCormick, Sophie Caronello and Christopher Condon.
This article was provided by Bloomberg News.