Employee Costs Are at 2-Year High Amid Inflation

Wages rose 4.7% last year but didn’t keep up with inflation, which increased to 4.9%.

January 31, 2022

Inflation and Rising Costs

ALEXANDRIA, Va.—The U.S. employment-cost index rose 4% last year, as costs for employers continue to rise at the highest rate in two decades, according to Labor Department figures, reports the Wall Street Journal. However, labor costs could be easing, as there was a seasonally adjusted 1% rise in compensation for the fourth quarter, down from with a 1.2% increase the previous three months.

The core personal-consumption expenditures price index, which is how the Federal Reserve prefers to measure inflation, increased to 4.9% in December 2021 over the previous year, while household spending fell 0.6% in December, according to the Commerce Department.

“Inflation has fundamentally picked up, and I think it’s fair to say that price gains are feeding back into wage gains as well,” Ben Herzon, executive director at IHS Markit, told the Journal. “There’s a lot of pressure on the supply side on both commodities and labor.”

The increase in labor costs is not keeping up with inflation, with hourly wages rising 4.7% in December compared to December 2020. The unemployment rate is now below 4%, and investors and the Fed now consider the labor market to be at or near full employment. Interest rates will be steadily rising in March, says the Fed, and Fed Chairman Jerome Powell says price increases have been primarily tied to the “dislocations caused by the pandemic.”

Powell also mentions that without more workers returning to the labor market leading to faster growth, higher wages could push prices up.

“We are attentive to the risks that persistent real wage growth in excess of productivity could put upward pressure on inflation,” Powell said.

The 2020 State of the Industry Compensation Report of 2020 Data found that the average rate for a full-time associate in the convenience industry is $11.89 an hour, while full-time store managers were paid $48,285 an average.

The Journal reports that McDonald’s raised its menu prices an estimated 6% last year, and labor costs at the fast-food company were up over 10% in the U.S. However, McDonald’s did report a 7.5% increase in U.S. same-store sales for its fourth quarter ended Dec. 31.

High costs of food and labor are forcing fast-food chains to up their prices on value deals and move to digital promotions only. According to Technomic Ignite data, the cost of breakfast value meals rose 19.6%, and snack value meals increased 11.5% in the third quarter of 2021.