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US Fed report tamps down concerns over wage gains

© AFP/File / by Heather SCOTT | The Federal Reserve says inflation remains subdued in the US and other advanced economies


A jump in US wage gains in January spooked financial markets, but the Federal Reserve in a report Friday seemed to tamp down concerns that the increases were poised to fuel inflation.

In its semi-annual report to Congress, the Fed said inflation remains subdued in the US and other advanced economies, and while the US economy is beyond full employment there does not appear to be a labor shortage.

The nearly three percent jump in average hourly earnings last month sent stock markets reeling amid concerns the increase would drive inflation and prompt the Fed to raise interest rates faster than expected.

The Fed has indicated it is likely to raise the benchmark lending rate three times this year, but many economists are now predicting four rate hikes, with the first one coming in late March.

But while the Fed report notes that hiring has continued at a solid pace, averaging 182,000 a month since July -- "considerably faster" than what is needed to absorb new workers -- there are other factors at work and some groups are still seeing higher unemployment, including blacks and Hispanics.

"Although employers report having more difficulties finding qualified workers, hiring continues apace, and serious labor shortages would likely have brought about larger wage increases than have been evident to date," the report said.

Even with an unemployment rate of 4.1 percent, "Nonetheless, wage growth has been moderate, likely held down in part by the weak pace of productivity growth in recent years."

And some groups face higher unemployment rates than the national average, with a rate of five percent for Hispanics and more than seven percent for blacks, compared to 3.7 percent for whites.

But the Fed acknowledges that problems could appear down the line.

"It is possible that labor shortages have arisen in certain pockets of the economy, which could be an early indication of bottlenecks that are not yet readily apparent in the aggregate labor market."

The report also seemed to see little reason for concern about price pressures, especially given low inflation in other major economies.

While it indicates some bafflement over the slow wage gains and sluggish inflation, it notes that increased competition from online retailers and other factors may be playing a role worldwide in keeping prices down.

Still the central bank will remain "watchful" for developments that might point to increased inflation pressures in the pipeline.

As it has repeatedly done in its policy statements, the Fed report repeated that the central bank expects the economy will continue to grow at a moderate pace with inflation eventually rising to the two percent target even with continued gradual increases in the key interest rate.

by Heather SCOTT

© 2018 AFP