Yellen: No signs yet of unsustainable wage increases

Treasury Secretary Janet Yellen said Sunday that she doesn’t see signs of inflation rising at a dangerous rate but warned that “prolonged excess demand” could trigger unsustainable wage increases.

In a Sunday interview with The New York Times, Yellen said she expected the recent jump in inflation to ease once the U.S. economy hits its post-pandemic stride later this year. Price and wage growth have both jumped in 2021 after falling sharply in 2020, both largely due to the economic impact of the coronavirus pandemic. 

Yellen, fellow members of the Biden administration and Federal Reserve officials have all expressed confidence that the spike in inflation is transitory, even as it exceeds the projections of economists. Even so, Yellen told the Times that she is paying close attention to low-wage earnings growth for signals of dangerous inflationary pressure.

“We don’t want a situation of prolonged excess demand in the economy that leads to wage and price pressures that build and become endemic,” Yellen said. “Looking at wage increases, you can have a wage price spiral, so you need to be careful.”

She added, however, “I do not see that happening now.”

Yellen and Biden administration economists have sought to strike a balance between letting intense demand for available workers spur wage growth and preventing that pressure from spurring unsustainable price increases.

Businesses around the U.S. have griped for months about difficulty hiring workers to meet a rush of consumer demand at pre-pandemic compensation rates. At the same time, the U.S. has added fewer workers per month than economists once expected and wages have risen at a quicker rate.

Biden has voiced support for workers demanding higher pay after years of tepid wage growth after the Great Recession. The Fed last year also adopted a new framework that called for letting inflation run slightly above its 2 percent annual target to make up for a decade of shortfalls.

Fed officials have argued that allowing inflation to catch up would help boost wage growth and allow the central bank to raise interest rates higher than it would have had it stepped in prematurely, giving it more room to respond to a future crisis. 

Yellen, who chaired the Fed from 2014 to 2018, told Bloomberg News on Sunday that she expected inflation to rise as high as 3 percent this year but would settle before the central bank would need to raise rates.

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said Sunday.