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Goldman economist says it’s tough to sustain 5% to 6% wage gains without driving up inflation

Edwin Lopez sorts the money in the cash register at Frankie’s Pizza on January 12, 2022 in Miami, Florida.
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Goldman Sachs’ chief economist said it would be difficult to sustain wage gains of 5% to 6% without causing “meaningfully high” inflation.

Jan Hatzius told CNBC on Tuesday that the pace of wage increases in the U.S. needs to slow down, as inflation heats up and becomes a central focus for the Fed and markets alike.

“I think 4% is OK. 5% to 6% is probably difficult to sustain without meaningfully higher inflation so that does need to come down,” Hatzius added.

The quarter-on-quarter annualized growth rate of wages has been running “well above” 4%, said Hatzius, who is also Goldman Sachs’ head of global investment research.

“The pace of wage gains that we’ve seen over the last couple of quarters now probably does need to slow somewhat,” he told CNBC’s “Squawk Box Asia.”

Overall, average pay in the U.S. jumped significantly in 2021 — to more than $31 an hour, a 4.7% annual increase, the U.S. Labor Department reported in early January.

Earlier this month, Goldman Sachs CEO David Solomon said “there is real wage inflation everywhere.” Compensation costs at Goldman jumped 33% to $17.7 billion for 2021, a whopping $4.4 billion increase fueled mostly by pay increases for good performance, executives said.

Meanwhile inflation is picking up with the U.S. consumer price index jumping 7% in December, the fastest rate since June 1982.

Those higher consumer prices are eating into workers’ salary increases despite their pay bumps. Effectively, the average worker got a 2.4% pay cut last year, according to seasonally adjusted data published by the Labor Department.

The United States’ six biggest banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Morgan Stanley and Goldman Sachs — raised some wages in 2021 and subsequently hiked expense projections for the coming year, according to a Reuters report.

Hatzius, however, is optimistic on wage inflation coming down.

“I think there are some reasons to believe that probably will come down because there’s some evidence … from surveys of businesses on their expectations for wage roll, that some of these recent increases [are] more one-off, one-off retention bonuses and things that are not necessarily going to repeat,” he said. “But I think that’s an important thing to watch.”

Economists expect inflation concerns to cause the Fed to tighten monetary policy this year in a bid to combat rising prices.

In December, a majority of the monetary policy committee forecast three interest rate hikes this year, but Goldman has predicted the Fed will hike rates four times in 2022.

“Inflation is quite political at the moment,” Hatzius added. “There is, I think, on both sides of the political aisle, a strong desire to bring inflation down.”

— CNBC’s Greg Iacurci contributed to this report.

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