Senator Pat Toomey (R-PA) had the best line at Federal Reserve Chair Janet Yellen’s Senate Banking testimony on Tuesday.
The big wage story of late is the news out of Wal-Mart, the biggest private employer in the US, raising its minimum hourly wage for 500,000 employees.
And Toomey connected this announcement to one of the most debated concepts in economics: NAIRU.
NAIRU, or the non-accelerating inflation rate of unemployment, is the level of unemployment at which inflation begins to accelerate.
Toomey said that Wal-Mart’s announcement, “suggests we might even be approaching NAIRU.”
What this argues is that with Wal-Mart feeling the need to raise wages in order to keep employees and remain competitive among its retail peers or any other similarly paying job in the economy, perhaps we’re closer to an acceleration of inflation than recent data may suggest.
And if we’re at the economic inflection point at which inflation — which is caused by too much money chasing too few goods, (with the idea here being that more wages for workers would create more pricing pressure in the economy) — finds its way into the economy, then the Fed could be right on the cusp of needing to raise interest rates, or at least feeling warranted in doing so.
Now, average hourly earnings have been lackluster, but the employment cost index showed some strength into the end of last year. And as highlighted by JPMorgan economist Michael Feroli in our latest most important charts feature, worker expectations of wage increases have surged.
The consumer price index has also declined of late as oil prices weigh on inflation, though inflation data excluding food and gas has held up ok. Both are running below the Fed’s 2% target, however.
But so the point Toomey raises is an interesting one. We won’t know when he hit NAIRU until we hit it, but maybe the need of a major private employer like Wal-Mart to raise wages is a sign that if we’re not there, we’re awfully close.
Yellen’s Senate testimony is at once super-interesting and extremely boring, but Toomey’s question — or point, rather — was the most interesting conceptual connection made during the whole process.
And for the charts, here’s the unemployment rate:
And here’s how many people think they’re getting a raise in the next year: