In downtown Nashville, chef Matt Farley is serving up trouble for Federal Reserve Chair Jerome Powell.
Acme Feed and Seed, the restaurant and honky tonk he manages on the main live-music drag, has been jacking up prices for everything from fried chicken to a rack of ribs. There are two big reasons. Food supplies are way more expensive – pork costs two-and-a-half times what it used to, for example. More worrying for the Fed, so are workers.
Farley is having to pay $17 an hour, up from about $12 before the pandemic hit, to hire dishwashers in a city where unemployment was just 2.3% in December. A line cook now makes more than $20, compared with $14 back in 2019. Early one evening this month, as the DJs were setting up on the second floor, Farley said he can see some relief coming from lower prices for food. But not for labor: “You’re never going to unring that bell.”
That’s the concern for Powell and his colleagues, sitting some 600 miles away in Washington, and trying to decide how much higher they must raise interest rates to tame inflation. What Farley’s describing comes uncomfortably close to what’s known in economist parlance as a wage-price spiral – exactly the thing the Fed is determined to avoid, at any cost.
How that works: prices rise, so workers want higher pay to preserve their living standards, so businesses ramp up prices even more to compensate for their bigger wage bills.
‘Extraordinarily Strong’
It’s not happening yet, and it might never happen, US central bankers say. Even so, they’re closely monitoring what’s become known as “supercore inflation” — prices in service industries, from restaurants to cleaners — partly because wages are such a big element of the cost calculation for those businesses. As prices ease for goods and commodities, the inflation fight is now focused on workers seeking more pay to keep pace with the cost of living.
The Fed already raised its benchmark rate by 4.5 percentage points over the past year, the steepest increase in decades. But every measure of supercore shows it’s still running far too hot. Markets now expect at least another 75 basis points of Fed hikes this year, which would take the top of its target range to 5.5%.
“We think we are going to need to do further rate increases,” Powell said this month. “The labor market is extraordinarily strong.”
Fed officials will hold their next rates meeting on March 21-22. Before that, they’ll get a bunch more data on inflation and the labor market – starting Friday when the personal consumption expenditures price index for January, another favored Fed gauge, is due out. Economists estimate that it likely moved sideways.
Robust consumer spending on services is one reason why companies have been able to charge more.
‘Just Been Nonstop’
Nicole Patterson says she’s raised prices at her home and office-cleaning business in Summerville, Georgia by at least 10% since the pandemic began in 2020 as the cost of cleaning products and gasoline climbed – and she might have to hike them a bit higher this year.
Orders are still through the roof. “I’ve always been fairly busy, but in the last two years there’s been a huge uptake in people calling me,” she says. “It’s just been nonstop.”
Persistent demand also allows service employers to offer more jobs and better pay. As firms in some industries, like tech, are laying off workers, service-sector companies are on the sidelines ready to hire.
Jared Reeves, who owns Certified Clean Care, a carpet-cleaning company in Watkinsville, Georgia, just this month raised prices for a rug wash. He now charges $3 per square foot for a synthetic rug, up from $2 before — in part to offset higher wages and more benefits for his staff.
“Everything costs more,” Reeves says. “It’s just the way it is.” He does see the market slowing down a bit, though. Higher prices are taking a toll, and “people have definitely started holding onto their money a little bit differently.”
‘Little More Normal’
There are some nascent signs that wage pressures might also be coming off the boil a bit – which would be welcome news at the Fed.
A measure of pay rates in the supercore service industries, put together by the White House Council of Economic Advisers, shows that average hourly earnings were rising at an annual pace of about 4.5% to 5% at the end of December — down from peaks of around 7% to 8% early last year.
Back in Nashville, chef Farley sees some evidence that wage rises are slowing — in an industry where he reckons workers have historically been under-paid — and the labor market may not be quite as tight as it was. He’s seeing salaries on Indeed.com, for jobs like a chef de cuisine, that aren’t quite as high as he’s come to expect. When he posts jobs at his own business, “for a year-and-a-half we’d run an ad and get a goose egg for applicants – nothing,” he says. Now they’re trickling back in.
“Maybe it’s just me wishful-thinking,” he says. “But I think it’s getting back to a little more normal.”
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