The Federal Reserve set to begin tapering its bond-buying program next month, which could set the stage for a moderation in inflation levels. According to Charles Schwab (SCHW) Managing Director and Chief Investment Strategist Liz Ann Sonders, however, a sustained increase in wages poses another major inflation risk.
“There's no question [median metrics of wage growth are] moving up … And at 4% to 4 1/2% wage growth, that's certainly above the pace that would allow inflation to come back down or be maintained at the 2% Fed's target,” Sonders told Yahoo Finance Live.
Going into 2022, however, she believes that some of the current inflationary pressures should be alleviated.
“And the one thing that gets missed, I think, in a lot of the analysis, we were so focused on base effects in the early stages of the spike-up in measures like CPI and PPI,” she added. “But the longer they stay elevated, the base effects will work in the opposite direction a year from now. So percentage-wise, we may have math in our favor as we look into next year.”
Sonders joined Yahoo Finance Live to discuss the inflation seen in the market, the effects of elevated wages, as well as her prediction on the Fed's response.
Consumer prices rose 5.4% — the highest pace of inflation seen since 2008 — for the year ending September, according to a report by the Bureau of Labor Statistics (BLS) released on Oct. 13. This came in slightly higher than consensus forecasts, which had estimated a 5.3% increase. Indexes for food and shelter contributed to more than half of the monthly all items seasonally adjusted increase for September.
Hourly pay for the average worker rose sharply in September amid the labor supply crunch, with a year-over-year increase of 4.6% — up 0.6% from the previous month. Prior to the pandemic, wages had been rising at a rate between 2.5% to 3%.
Sonders compared the current inflation picture to the Great Inflation of the 1970s, stating that the question lies in whether the wage increases are sustained.
“[Sustained wage increases were] the problem in the 1970s,” Sonders said. “It wasn't kind of a one-time reset. It was sustained. And that was because the psychology around inflation really kicked in. And that helps to trigger the spiral. And I'm not quite sure we're there yet.”
As for the crossroads the Fed finds itself in, Sonders noted that tapering and rate hikes will not do global supply constraints any good. The ideal scenario, she said, is if elevated prices lead to a quelling in demand — which, in turn, may help ease supply chain woes.
“[The Fed is] in a bit of a pickle because they certainly know that stepping up and tightening more quickly, either with tapering or maybe moving up a bit time horizon the rate hikes, [if] not the elixir for what ails global supply chains and the bottlenecks,” Sonders said. “That rub, of course, would be if they feel that they have to step in to quell demand in order to allow for supply to catch back up.”
Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV