U.S. wage growth slowed slightly in February but remained near historically high levels, adding to inflationary pressures when consumer prices were also rising rapidly.
Private-sector average hourly earnings rose a seasonally adjusted 5.1% in February from the previous year, cooler than the 5.5% gain in January, the Labor Department said Friday. Four of the past five months have seen annual wage gains exceed 5%. By contrast, wages rose an average of 3.2% a year in the two years to February 2020, before the Covid-19 pandemic hit the U.S. economy.
Wage increases were particularly strong in industries that have seen a surge in demand as the effect of the Omicron variant of Covid-19 fades. Retail workers saw wages rise 7.1%, up from 5.8% in January. And transportation and warehousing wages were up 7.7% versus 7.1% in January.
Pay for leisure and hospitality workers—which include those employed at bars, restaurants and hotels—was up 11.2% on the year, down from 12.6% in January. The sector has seen some of the fastest wage growth in the recovery from the pandemic. But that growth has eased slightly over the past two months.
“It’s a sizzling hot labor market,” said Diane Swonk, chief economist at accounting firm Grant Thornton.
Consumer prices overall were up 7.5% in January over the previous year, the highest rate in 40 years, according to a separate Labor Department report released last month. The department’s February inflation report is set for release next week.
Many of the job gains in February were in relatively lower-paid industries, such as leisure and hospitality, which accounted for 179,000 of the 678,000 new jobs added. That likely held down average wage increases, which could partly explain why wage growth was weaker in February than in January, Ms. Swonk said.
Production and nonsupervisory workers—a category that includes lower-ranking employees—saw a 6.7% year-over-year wage rise in February, unchanged from January, the report showed. Pay raises for these workers are higher than at any point in 40 years, with the exception of April and May 2020, when the labor market rebounded from the initial effects of the pandemic.
“You really saw the younger, lower-wage workers dominate the gains,” said Ms. Swonk. “It suggests that we haven’t really lost momentum on the wage side of the equation.”
Wage growth for higher-paid industries, by contrast, was more muted. Financial activities, for instance, saw pay rise 1.9% in February from the previous year, down from 3.7% in January.
Economists say rapidly rising wages could reinforce inflation, a phenomenon known as a wage-price spiral. As wages rise, businesses try to offset those costs by raising prices on their products. Workers then demand higher wages to afford those more expensive products, leading to even more price increases.
Service sector wages grew 5.2% on the year, a faster pace than wages in the goods-producing sector, which were up 4.6%. That could set up faster inflation for services in the coming months, said Josh Shapiro, chief U.S. economist at MFR, Inc.
Consumer prices in the services sector excluding energy services were up 4.1% in January, according to the Labor Department.
“If labor costs are going up rapidly, which they are, it’s probably only a matter of time before you start to see service sector inflation start to pick up,” said Mr. Shapiro. “That is the big worry for another leg up in inflation.”
A wage-price spiral could put pressure on the Federal Reserve to raise interest rates more rapidly than anticipated to choke off inflation. That could have the side effect of slowing or reversing economic growth, which could tip the economy into recession.
Already there are signs that companies are beginning to factor in future wage increases when setting prices.
Steven Cirulis, chief financial officer of sandwich chain Potbelly Corp. , told investors on a March 3 earnings call that the company had raised prices several times over the past few months to cover a 7.3% increase in wages over the past year. He said he expects pay to continue to rise, which will likely imply more price increases in the future.
“That helps us offset a big portion of those inflationary pressures,” he said.
Chipotle Mexican Grill, Inc., a restaurant chain, raised average wages to $15 in May, “which was partially offset by menu price increases,” said chief financial officer John Hartung. Prices are up about 10% over a year ago, the company said.
“We still have pricing power to use as needed if inflation continues to rise going forward,” he told analysts on a Feb. 8 earnings call.
Michael O’Sullivan, chief executive of clothing retailer Burlington Stores, Inc., said he expects higher wage rates are here to stay. “Now for retailers, that’s going to mean not just a transitory increase in the cost base, but a permanent increase in their cost base,” he said in a March 3 call with analysts. “And the only way to absorb those costs is for retailers to keep prices elevated and also raise prices further.”
Write to David Harrison at [email protected]
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