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How Much Do Labor Costs Drive Inflation?

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Abstract

Tight labor markets have raised concerns about the role of labor costs in persistently high inflation readings. Policymakers are paying particular attention to nonhousing services inflation, which is considered most closely linked to wages. Analysis shows that higher labor costs are passed along to customers in the form of higher nonhousing services prices, however the effect on overall inflation is very small. Labor-cost growth has no meaningful effect on goods or housing services inflation. Overall, labor-cost growth is responsible for only about 0.1 percentage point of recent core PCE inflation.

Suggested Citation

  • Adam Hale Shapiro, 2023. "How Much Do Labor Costs Drive Inflation?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2023(13), pages 1-6, May.
    • Handle: RePEc:fip:fedfel:96251
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    References listed on IDEAS

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    1. Reuven Glick & Sylvain Leduc & Mollie Pepper, 2022. "Will Workers Demand Cost-of-Living Adjustments?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2022(21), pages 1-6, August.
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    Cited by:

    1. Sylvain Leduc & Daniel J. Wilson & Cindy Zhao, 2023. "Will a Cooler Labor Market Slow Supercore Inflation?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2023(18), pages 1-6, July.
    2. Philippe Andrade & Falk Bräuning & José Fillat & Gustavo Joaquim, 2024. "Is Post-pandemic Wage Growth Fueling Inflation?," Current Policy Perspectives 2024-1, Federal Reserve Bank of Boston.

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