Surging Wages Are a ‘Super Core’ Push to Inflation, Summers Says
Surging Wages Are a ‘Super Core’ Push to Inflation, Summers Says
(Bloomberg) -- Former Treasury Secretary Lawrence Summers said that surging wages amount to a powerful underlying impulse to U.S. inflation that reinforces the need for the Federal Reserve to boost its benchmark interest rate well above the level most expect.
“We should be thinking in terms of wage or labor-cost inflation as a kind of ‘super core’ measure of inflation,” Summers told “Wall Street Week” on Bloomberg Television. “It’s hard to escape the conclusion that it’s running at 5.5% or more.”
Summers spoke after a government report Friday showed that employment costs rose in the first quarter of this year by the most in comparable data back to the early 2000s. The index climbed 1.4%, the third straight quarterly advance of at least 1%. That’s feeding into higher prices as companies charge their customers more to offset compensation costs, as well as greater costs for materials.
Fed Chair Jerome Powell and his colleagues, who are expected to raise rates by half a percentage point next week, will need to keep going past the so-called neutral rate, said Summers, a Harvard University professor and paid contributor to Bloomberg TV. That’s the level at which the the rate neither stimulates nor restrains the economy.
“In order to reduce inflation, you need to raise real interest rates above their neutral level,” Summers said. So if inflation is running at 3% to 4% and the neutral real rate is 0.5 percentage point, “then you’re going to have to be up in the 4.5 to 5 range to get inflation meaningfully down,” he said.
The Fed’s long-run estimate of its policy rate, unadjusted for inflation, is about 2.4%. Fed officials projected boosting the benchmark up to about 2.8% next year, holding there through 2024. The rate is currently a range of 0.25% to 0.5%.
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