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Inequality Would Widen if U.S. Policies Spur Sustained Inflation — Outlook

By Jon Hilsenrath 

Federal Reserve and Biden administration officials say economic inequality is bad and they aim their policies in part at helping to reduce it. In the short run, at least, those policies might be widening inequality, not shrinking it.

In recent months, inflationary pressures have caused the cost of living to rise faster than paychecks, meaning a paycheck hasn't been going as far as it did before. Consumer price inflation in April rose 4.2% from a year earlier, while hourly pay for production workers rose 1.2%, the Labor Department reported last week.

The department also said that, after adjusting for inflation, wages of production workers and nonmanagers fell 3.3% in April from a year earlier, the largest such decline since an inflation shock and recession in 1980.

Economists, policy makers and many in the voting public have differing views about income inequality, and the increasing concentration of wealth in the top 1%. Some see inequality as a sign of an unfair economic system that the government should address; others say a healthy capitalist economy rewards its most productive citizens.

A fall in inflation-adjusted wages hits low- and moderate-income households especially hard, because they dedicate a larger share of their paychecks to covering daily living costs. The numbers might be temporarily skewed, but if inflation persists and is fueled by the Fed or the Biden administration's policies, it could raise questions about the costs and benefits of those policies for working Americans.

Economists describe inflation as a regressive tax -- meaning it hits low-income workers hardest. "I don't see anything good happening from an economic inequality perspective," said Karen Petrou, a financial analyst and author of "Engine of Inequality," a critique of Fed policy. "Most American households are living hand to mouth."

Ms. Petrou said a decade of the Fed's low-interest-rate policies have mostly helped the wealthy by pushing stocks higher. That effect has accelerated recently. While inflation-adjusted wages fell in April from a year earlier, the Dow Jones Industrial Average was up more than 40% over the same period. The wealthiest 10% of U.S. households own 88.5% of stocks, according to Fed data.

There are several reasons why April's unusual tilt in wages might be an anomaly. Due to Covid-19, the economy in April 2020 was like a patient in shock on an emergency-room table, with vital signs moving wildly in different directions. The crisis drove down prices of restaurant meals, hotel stays and airline tickets amid nationwide business shutdowns, while broad measures of wages oddly went up because low-wage restaurant and hotel workers were sidelined.

That makes it difficult to make comparisons to April from a year ago, as do other factors. Global chip shortages have caused bottlenecks in new car production and pushed households to buy used cars, driving their prices higher. Prices for oil, gasoline and crops are also marching up.

On a month-to-month basis, real wages have fallen in three of the past four months, though they are up from two years ago.

However measured, the recent drop in real wages points to a risk should these trends be sustained. Government efforts to boost economic activity and hiring -- through low interest rates and trillions of dollars in new federal spending -- could widen inequality if they lead to continued outsize increases in the cost of living.

Mary Daly, president of the Federal Reserve Bank of San Francisco, said she is comfortable with the central bank's approach. She sees consumer price increases as temporary, driven in part by the weird "base effect" comparisons to last year and by temporary supply bottlenecks that will be resolved over time. In the Bay Area, she notes, lettuce has been in short supply at restaurants, which were locked down for months. She says eventually the lettuce will start showing back up at restaurant kitchens and restaurant salad prices will moderate.

"Demand is coming back with a bang and supply comes back with a lag," she said. "These are transitory fluctuations."

Inflation will only become a sustained problem if suppliers and workers embed price increases in longer-run contracts because they see cost upticks as permanent, she said. So far, she doesn't see that happening, a view she said markets affirm. In the Treasury bond market for inflation-protected securities, called TIPS, investors see inflation of 2.3% five years from now. That is only slightly above the Fed's 2% goal and less than expected inflation at other recent times, such as in 2011 and 2012.

Forty or 50 years ago, wages tended to go up automatically because of cost-of-living adjustments in union and other labor contracts, Ms. Daly noted. Such adjustments don't happen as often now. There is a trade-off. The benefit of that is that inflation tends not to go in upward spirals as it did in the 1970s; the bad news is workers can take a temporary hit at times like now.

In the mind of many Fed policy makers, inflation has been too low for too long -- undershooting its 2% goal. Most Fed officials see low interest rates as a path to stronger wage growth: By helping to boost demand and push the unemployment rate down, they argue, they are giving workers bargaining power with employers to demand sustainable pay increases that outstrip inflation. That is what was happening in 2018 and 2019, before the Covid-19 crisis.

Money pouring into the economy isn't just coming from the Fed. A $1.9 trillion coronavirus-aid bill was signed by President Biden in March that sent $1,400 checks to households, extended jobless benefits and expanded child tax credits.

Jared Bernstein, a member of Mr. Biden's Council of Economic Advisers, said the administration's policies also are creating opportunities for low-wage workers by boosting demand. "We are creating job and earnings opportunities for workers who have been left behind," he said.

"It's important to separate transitory issues from the bigger picture here, which is an economy back on the move," he said. Inflation, he added, should be a temporary problem, while the jobless rate is coming down fast.

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com

 

(END) Dow Jones Newswires

May 16, 2021 10:14 ET (14:14 GMT)

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