The Federal Reserve got some bad news on the service sector, one of the last redoubts of stubbornly high inflation in the U.S. That's fueling further speculation that interest rate increases may yet have a ways to go.
A Labor Department report on Friday showed that average hourly earnings for private sector service-providing jobs rose 0.6 percent in November from the previous month, the fastest pace since October 2021.
The numbers suggest a trend rate of service-wage inflation of about 6.2 percent, far too high for the Fed, which probably sees the sustainable non-inflationary rate sitting somewhere below 3.5 percent. Overall hourly earnings are climbing by slightly less, and nonfarm payroll growth slowed slightly to 263,000 jobs in November. But the service jobs are critical.
As Fed Chair Jerome Powell laid out in his speech last week, the service sector is probably the most vexing piece in the U.S. inflationary puzzle. The supply chain snarls that probably started the whole mess have shown strong signs of getting straightened out, and the prices of many goods and commodities have been falling.
Forward-looking measures of housing rents, another key driver of the highest inflation in 40 years, are also hinting at moderation. But the other core services categories continue to challenge the Fed, and wages are probably a big part of that.
There's a perverse element to cheering for weaker wage growth, generally associated with a soft labor market and higher unemployment. The idea of wage-price pass-through has many skeptics who note that the current bout of inflation wasn't caused by a tight labor market.
The late-pandemic economy is unique from earlier decades in the extreme labor shortages it created, and it's logical to suspect that there would be a direct line between the quickly rising wages of barbers and the cost of a haircut, or the earnings of hotel workers and the price of a vacation.
In the case of this month's data, the service sector wage increases looked broad based, including jumps in retail trade, professional services, and a rebound in health and education services, which had been showing signs of cooling in the same data.
But with the Fed committed to preventing inflation from becoming entrenched, policymakers are likely to err on the side of doing too much rather than too little. Every time they get a piece of data like the wage gains, it only reinforces their will to stay the course.