Could Wage Inflation Rebound Soon?

Wells Capital Management’s Jim Paulsen says that declining wage inflation — which has allowed the Federal Reserve to continue its “crisis-like” loose monetary policy — may be coming to an end sooner than many think. 

Paulsen says that for the past 30 years or so, wage inflation has continued to decline for two-and-a-half to four years after the end of recessions. “Many believe the continued deceleration of wage inflation in this recovery is a unique event tied to the severity of the 2008 recession and to the still elevated 7.7 percent unemployment rate,” he writes in a recent research note. “However, the behavior of wages in the contemporary recovery is certainly not unique. Rather, wage inflation is following its pattern of the last three recoveries quite closely. If wages continue to respond as they have in the last 30 years, labor inflation will likely begin to rise again sometime in 2013.”

Paulsen says that could have significant implications for investors. “Investors may want to ponder how ‘out of line’ the current Fed policy may appear should the unemployment rate continue a decline towards 7-ish percent this year and wage inflation surprisingly begins to rise,” he says. “Could the Fed lose its mandate (falling wage inflation) much sooner (i.e., in 2013) than most can imagine?”