Will rising wages push inflation even higher? Labor costs rose at their fastest pace in more than two decades last year. That growth eased a bit in the final months of 2021, which could give the Federal Reserve's inflation watchdogs some relief.

Will rising wages push inflation even higher?

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Some encouraging news from the Labor Department today. Workers' paychecks are getting bigger. With unemployment now below 4%, businesses are having to pay more to attract workers, but labor costs are not rising so rapidly as to raise alarm at the Federal Reserve, which is already on high alert for inflation. NPR's Scott Horsley reports.

SCOTT HORSLEY, BYLINE: The Labor Department said today that if you count both wages and benefits, employers were paying 4% more for workers in December than they were a year ago. That's the biggest jump in compensation in two decades. And economist Sarah House of Wells Fargo says it's another sign of just how competitive the market for workers is these days.

SARAH HOUSE: Businesses are still having to battle pretty fiercely for workers right now. And in a lot of cases, that's stepping up pay, but it's also raising perks like paid time off or perhaps bonuses.

HORSLEY: Workers in some typically low-wage industries saw even bigger gains as demand rebounded from the pandemic recession and employers scrambled to staff up. Compensation in retail stores rose more than 6% last year. In restaurants and hotels, it was up nearly 8.5%.

Those wage gains and better benefits are good for workers, but the Federal Reserve has been on the lookout for any warning signs that rising wages might push prices even higher, leading workers to demand still more money - the kind of wage price feedback loop that produced sky-high inflation in the 1970s. Today's report may help to allay those concerns, at least for the moment. House noted that labor costs rose more slowly in the last three months of the year than they had in July, August and September.

HOUSE: The fact that we did see some easing over the course of the fourth quarter is probably making Fed officials breathe a little sigh of relief.

HORSLEY: A separate report from the Commerce Department today also suggests inflationary pressures may be cooling somewhat. The report shows prices rose less between November and December than during the two previous months. Annual inflation is still the highest it's been since 1982, however, and forecasters still expect the Fed to start raising interest rates in March in an effort to regain control over prices.

The president of the Minneapolis Fed Bank tried to put that move in perspective today. Neel Kashkari told Morning Edition the central bank is not trying to tap the brakes on the economy, just letting its foot off the accelerator a little bit.

Scott Horsley, NPR News, Washington.

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