Inflation debates have been dominated by fallout from the pandemic and economic reopening, most of which has been viewed as transitory: lumber and used car prices in the first half of the year, the cost of ocean freight more recently. Rising housing rents are now expected to flow into the inflation data as well. But the most underappreciated inflation risk is wage growth.

Even with the disappointing number of jobs added in last week’s report, worker incomes continued to rise quickly in September, and those increases are more likely to persist. We shouldn’t expect inflation to return to 2% until either job growth or wage growth slows down.

So much of the labor market discussion and how it might feed into inflation has been looked at through the lens of the unemployment rate or the job shortfall compared with February 2020 pre-pandemic times. We have five million fewer jobs today than we did back then. If you consider all the jobs we would have added had we continued at the same growth rate as early 2020, the hole is more like eight million. If we’re so far from those employment levels, the thinking goes, the labor market can’t be a major driver of inflation.

But that’s only part of the picture. Income growth — the amount of money workers are taking home — is a more relevant factor for inflation than employment levels. For that, aggregate weekly payrolls — essentially jobs times hours worked times wages — is the better measure. In September, aggregate weekly payrolls for non-managerial workers grew 10.7% year-over-year, its sixth straight month of 10% year-over-year growth, a dynamic we haven’t seen in almost 40 years. And this isn’t due to a few big months in the spring — September’s monthly growth rate was 13.2% on an annualized basis as fast wage growth compensated for the disappointing increase in the number of jobs.

The only time we’ve seen aggregate weekly payroll growth in the double digits was between 1968 and 1984, when inflation was a problem in the economy. In the 2010’s the growth rate was closer to 4.5%, which worked out to around 2% employment growth and 2.5% wage growth. Right now we’re closer to 4% employment growth and 6% wage growth.

Employment growth might slow down substantially, but it would be ominous if we were left with a jobs shortfall of between five and eight million. That would suggest a structural change in the labor market that would reduce how much the economy can grow in the coming years. On the other hand, if we do see millions of people come back to work over the coming months, that’s challenging on the inflation front too, because those new workers will have incomes that get spent, perpetuating double-digit income growth in an economy struggling to fall back to 2% inflation.

As for wage growth, there was a period of time earlier in the year when the trend seemed limited to workers in lower-paid industries such as leisure and hospitality that were in hot demand as the economy was reopening. But fast wage growth has now broadened out to more industries. For education and healthcare workers, wages grew 7.3% year-over-year in September. In the transportation and warehousing industry, wage growth is running at an even hotter 8.6% year-over-year. And the rate at which workers are quitting their jobs continues to increase, suggesting they’re chasing higher wages throughout the labor market. It’s unclear to what extent wage growth will slow — or if it will slow at all — as the labor market continues to tighten.

This is an awkward situation for policymakers, because who in their right mind is going to suggest that we’d be better off if either job growth or wage growth slows down? But history suggests at least one of the two must ease if inflation is going to return close to the Federal Reserve’s target of 2%. Even in the late 1990’s, worker incomes were growing at a rate closer to 6% to 7% a year, in an environment where inflation was kept in check by booming productivity growth. If we don’t see a slowdown by the end of the year, look for the Fed to have a meaningfully more hawkish tone as we head into 2022.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He’s been a contributor to the Atlantic and Business Insider and resides in Atlanta.

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