Economists worry rising wages may catch the Fed off guard

Wed Jul 23, 2014 5:20pm EDT
 
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By Lucia Mutikani

WASHINGTON (Reuters) - Wages may be growing at a faster clip than envisaged by U.S. policymakers, with a recent raft of business surveys showing an increase in the number of companies raising compensation.

One closely watched wage growth measure, a gauge produced by the National Federation for Independent Business, has reached a seven-year high. A turn in this index, which began moving up late last year, historically has been followed by a pick-up in wage growth nine months later.

That and evidence of a tightening labor market has some economists worried the Federal Reserve may miss the signs of accelerating wage growth and end up with an inflation problem.

"The biggest threat to the Fed's policymaking is that six years of not having to deal with wages doesn't allow you to understand how wages will change when you come back to a more normal full-employment type of economy," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

"When the dam breaks, it breaks and you don't necessarily see a slow rise in compensation."

Fed Chair Janet Yellen told Congress last week she would keep monetary policy loose until hiring and wage data show the lingering effects of the financial crisis are "completely gone."

"While rising compensation or wage growth is one sign that the labor market is healing, we are not even at the point where wages are rising at a pace that they could give rise to inflation," she said.

But some economists are skeptical.   Continued...

 
Morning commuters are seen outside the New York Stock Exchange, July 30, 2012. REUTERS/Brendan McDermid