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09/03/2021

Higher wages could lead to more inflation, warns NRF economist

Marianne Wilson
Editor-in-Chief
Marianne Wilson profile picture
Walmart is among the retailers increasing pay for hourly associates.

Strong consumer spending during the past year has been boosted by government stimulus programs, but that’s about to change, according to National Retail Federation chief economist Jack Kleinhenz.

Future economic growth will rely more on the labor market and job creation as the benefits of the government efforts subside,  Kleinhenz said. Although monthly child tax credit checks will bring extra income to many consumers, supplemental unemployment benefits are coming to an end and most federal stimulus checks have either been spent or set aside in bank accounts.

“Consumer spending is currently far above pre-pandemic levels thanks to unprecedented monetary and fiscal policies that have backstopped demand by putting money into wallets,” Kleinhenz said in an article in the NRF Monthly Economic Review. “But as the economy moves forward into the later months of 2021, federal aid will be tapering off and there will be an important focus on the ability of the labor market to generate ongoing strength in wages and salaries to support spending. U.S. consumers remain in the mood to spend but the labor market and job creation will play an increasing role in their ability to do so.”

Labor Market

The labor market remains extremely tight. As of June, there were 10.07 million nonfarm job openings but only 9.48 million people seeking work – just under one unemployed worker for each job opening in the economy. With more job openings than people looking for work, wages and salaries rose 3.2% year-over-year for the 12 months ending in June. And the Employment Cost Index, which includes wages, benefits and other factors to measure total compensation costs while factoring out shifts between industries or occupations, grew 2.9%, its largest increase since the end of 2018.

Retail and restaurant chains across the board, from CVS Health to Lululemon to Chipotle have been adding benefits and increasing wages to attract hourly workers. The effort has gained steam as the holiday season approaches. Most recently, Walmart announced its third wage increase in a year. Kleinhenz said the higher wages employers are offering to competitive could lead to more inflation in the coming months.

“The bulk of the recent upturn in U.S. inflation has been driven primarily by supply chain bottlenecks and low levels of inventories, but high labor costs are often passed on to consumers and are considered a precursor of broader inflation,” he explained. “We will be monitoring labor market developments intently to determine if expanded payrolls expected in the coming months will influence inflationary pressure, especially as wages and salaries increase.”

The spreading delta variant of COVID-19 could cause “relatively modest” disruption to retail sales, but is not likely enough for NRF to revise its forecast that 2021 sales should grow between 10.5% and 13.5% over 2020. The variant could have a negative impact on restaurants, travel and accommodations, possibly causing a shift back to spending on retail goods after those service sectors saw gains this summer with the economy reopening, Kleinhenz noted.

[Read More: Retail sales to exceed $4.44 trillion in 2021, as NRF revises annual forecast upward]