Why a Wage-Price Spiral May Not Materialize in the US

Episodes of high inflation often trigger worries about a “wage-price spiral”, a phenomenon whereby workers respond to high prices by demanding higher wages, with the resulting increase in nominal incomes putting further upward pressure on prices. This is a highly undesirable and destabilizing outcome. Is the US in real risk of a wage-price spiral or has the overall wage inflation already peaked?

Chief Economist

Acute concerns persist regarding the outlook for both US and global inflation. While there are good reasons to believe that a new, higher-inflation regime may materialize (based on deglobalization, green transition, among other reasons), we also feel that too much is being made of the inflation surge in the past year. In our view, most of the current inflation spike reflects hugely distorted demand and supply dynamics that are bound to normalize. In fact, we believe that the process of normalization has already begun, facilitating a material and sustained deceleration in inflation close to pre-COVID-19 levels.

The steep rise in inflation over the past year was the result of market mechanisms at play as economic agents (consumers and producers alike) responded to new demand conditions. Indeed, it all started with demand and the extraordinary distortions introduced thereto by the pandemic. The core distortion had to do with the unprecedented surge in goods consumption during the pandemic – by the second quarter of 2021, real goods consumption in the United States (US) was 18% higher than it was at the start of 2020 (Figure 1).

Figure 1: Skewed Consumption Patterns Should Normalize

Ripple Effects of the Surge in Goods Demand

Even if the pandemic had not hindered productive capacity, we would still have witnessed an inflation spike since the system was simply not built to service the astronomical surge in demand. Of course, productive capacity was hindered as well, further exacerbating price pressures, and not just within manufacturing. All in all, the surge in goods demand not only triggered a production response but also a fervent scramble to move those goods into consumers’ hands.

Consequently, while overall payroll employment in the US is just returning to the January 2020 level, employment in sectors most directly connected to the goods economy has long since exceeded it. For instance, if employment in transportation and warehousing stood 12% above the January 2020 level in May this year, for couriers and messengers within the sector, it logged an incredible 23% above that level (Figure 2).

Figure 2: US Payroll Employment – Transportation & Warehousing

Unsurprisingly, this labor demand surge drove wage inflation in the sector to record highs (Figure 3). From the start of 2007 until the end of 2019, average wage inflation in transportation and warehousing was just 1.9%, but during the first five months of 2022, it jumped to 7.5% YoY! Similarly, according to the most recent monthly data, total average hourly earnings (AHE) in transportation and warehousing were up 7.8% YoY. And within the segment, average AHE for air transportation and couriers and messengers rose to 14.4% and 13.6% YoY, respectively. By contrast, back in January 2020, the three corresponding measures of wage inflation for these segments were at 4.2%, 4.0% and -2.2% YoY, respectively.

Figure 3: Surge in Labor Demand Drives Wage Inflation


It seems highly unlikely that these employment and wage parameters define the new sustainable equilibrium levels in the industry. Our macro forecast assumes that consumption patterns continue to gradually normalize, with US real goods consumption declining slightly this year and a little more in 2023. This should trigger a shift in wholesale and retail behavior and a move away from what had so far been a desperate drive to boost merchandise inventory levels to a more cautious approach. Less goods consumption and less inventory building will mean less people needed to move those goods across the country.

Wage Inflation May Have Peaked in the US

In light of this, it is not far out to suggest that employment levels in parts of the warehousing and transportation industry will decline by a little over the next couple of years, bumping up labor supply in other sectors. In conjunction with further improvement in the labor force participation rate, this should ease the intense wage competition for workers that has been so challenging for employers in general and small businesses in particular. This means, even if employment were to continue to show growth in other parts of the economy, wage pressure may experience a decline. Indeed, we suspect that overall wage inflation may have already peaked (Figure 4).

Figure 4: Wage Inflation May Indeed Have Peaked


It is important to remember that education employment is already back to the January 2020 level, professional and business services employment is 4.0% higher and healthcare employment is only 1.2% lower. Consequently, the scope for further rapid employment growth in these industries is limited. The one sector where employment remains considerably below pre-COVID-19 levels is leisure and hospitality, where payroll levels are still 7.4% below the January 2020 level.

We suspect it was from this space that a lot of labor migrated into the transportation and warehousing industry, forcing employers there to raise wages aggressively to either retain or attract workers. Those pressures may now be starting to ease. AHE in leisure and hospitality were 10.3% higher in May than a year ago, almost double the average for the entire economy. However, this is already three percentage points below the November-December peak and has further room for moderation.

Risk of Wage-Price Spiral Not High For the US

We have long highlighted the importance of wage inflation in defining sustainable overall consumer price inflation. After all, absent a correspondingly rising stream of income, consumers would need to scale back real consumption to compensate for higher prices. In that sense, high inflation sows the seeds of its own demise. Given the dynamics discussed here, we are optimistic that the risk of a wage-price spiral is not high for the US economy.

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