How Wage Increases Became the Fed’s Red Line; food and housing costs outpace wages

[June Zaccone]

How Wage Increases Became the Fed’s Red Line John Ruehl, Posted on December 4, 2025 by Yves Smith

Yves here. This John Ruehl article usefully describes how the Fed has made wage increases a, if not the, primary indicator for when inflationary pressures have gotten serious enough to warrant central bank action. But it moved to that practice in the Volcker Fed, when labor had considerable bargaining power and many labor contracts contained cost of living adjustments. Not only have things changed a lot since then, but Ruehl points out how some measures the Fed uses overstate the pace of pay increases among lower wage workers and thus contributes to rising inequality.....

By John P. Ruehl, an Australian-American journalist living in Washington, D.C., and a world affairs correspondent for the Independent Media Institute.

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At first glance, the average weekly wage for the last two decades appears strong, often outpacing general inflation. Data from the Center for American Progress indicate that workers, especially lower-income workers, have seen real gains between the COVID-19 pandemic and late 2024.

Yet these figures can be misleading. Recessions often skew the numbers because lower-paid workers are more likely to be laid off while higher earners remain, and new hires during recoveries can temporarily boost averages through starting pay or signing bonuses. Meanwhile, common inflation metrics like the consumer price index for all urban consumers can often understate the cost of livingfor lower-income households, and most wages remain below pre-pandemic levels. In fact, real hourly wages for most workers have barely moved since the 1970s and have typically been slow to recover once they fall behind.

While the Fed has long viewed suppressing wage inflation as central to stabilizing the economy and preventing runaway inflation, this was not always its primary mission. The Federal Reserve was founded in 1913 to prevent banking panics by providing liquidity to struggling banks, with its authority expanding dramatically during the Great Depression as it took on a central role in monetary policy, bank supervision, and financial system oversight.

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The Fed’s strategy became orthodox, but its success has been mixed. It certainly helped tame inflation and return the economy to growth, but real wages have stagnated for most workers since. Meanwhile, the financial sector expanded dramatically, benefiting from higher margins, speculation, and rising asset prices as the Fed focused on wage inflation instead.

By the mid-to-late 1990s, however, the Fed demonstrated that wage growth and price stability could coexist. Fed Chairman Alan Greenspan allowed the economy to run hotter than some economists recommended, betting that productivity gains from technology would keep inflation in check. Unemployment fell to historic lows, and lower-income workers in particular saw modest wage gains. In the 2000s and 2010s, inflation remained moderate, and wages remained largely stagnant.

After nearly three decades of low inflation, the inflation surge of the early 2020s was driven largely by corporate markups, supply chain shocks, and energy prices, and not wage growth. From the early 1990s through the 2010s, wages were also not a significant source of the limited inflation. Instead, asset bubbles (most notably the 2000s housing bubble), along with food and energy price shocks, were responsible for price increases.

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https://x.com/KobeissiLetter/status/1996389739293819272

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June Zaccone
National Jobs for All Network
http://www.njfac.org