Inflation Rises at Fastest Pace Since 1982 as Wages Jump

Inflation came in strong and wage growth remained elevated at the end of 2021, setting the stage for a challenging economic year in which the Federal Reserve and White House will try to maintain momentum in the job market while wrestling price gains under control.

The personal consumption expenditures index, the Fed’s preferred inflation gauge, came in at 5.8 percent in December, up from 5.7 percent the prior month. That beat out the prior month to become the fastest reading since 1982.

Inflation is moderating somewhat on a monthly basis, but its still-high annual readings come at a moment when pay is picking up briskly. While robust wage growth is good news for workers, it also increases the risk of sustained high inflation: Companies may raise prices to try to cover rising labor costs.

The Employment Cost Index, a measure of pay and benefits the Fed watches closely, picked up by 1 percent in the final quarter of 2022 from the prior year. While that was less of a gain than economists in a Bloomberg survey had forecast, it capped a robust year of increases: The gauge climbed 4 percent in the year through December, with its wages and salaries measure picking up by 4.5 percent.

Price gains are eating away at consumer confidence even as wages rise, making inflation a political liability for the Biden administration and Democrats during a midterm election year. While the White House has taken steps aimed at relieving pressure on choked supply chains, the job of slowing down demand to bring prices under control rests primarily with the Fed.

The Fed’s policymakers have signaled that they will likely begin to raise interest rates at their March meeting as they try to prevent today’s quick price increases from becoming a more permanent feature of the economic landscape. Markets are nervously eyeing the Fed’s next steps, trying to gauge how much it will raise rates and how rapidly. Higher borrowing costs could slow down economic growth and lower stock prices, taking some of the buoyancy out of America’s expansion.