Workers’ wages are rising, complicating the Fed’s inflation fight

But for policymakers, those persistently strong wage gains are both a blessing and a curse. On the one hand, they help sustain consumption and prevent the economy from sliding into recession despite the central bank’s aggressive interest rate hikes. Yet they also signal the fight against inflation is far from over.

“Wage inflation remains extremely elevated,” said Gus Faucher, chief economist at PNC Financial Services. “Businesses are paying the same worker 5 percent more in wages and benefits than they were a year ago. That’s much, much higher than the 2.5 percent to 3 percent increases we were seeing before the pandemic, and is contributing to high inflation across the economy.”

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The Fed has been taking aggressive steps to slow the economy in hopes of putting a lid on rapidly rising prices. It has raised interest rates by about 5 percent in the past year, and is expected to do so again by a quarter-percentage point next week.

Those higher borrowing costs are already working their way across the economy, by slowing housing, manufacturing and other industries most sensitive to interest-rate changes. But the job market, while slowing, has remained incredibly resilient. Employers continue to hire hundreds of thousands of workers a month and unemployment, at 3.5 percent, is near 50-year lows.

That tight environment, in which job openings continue to outnumber available workers, has helped lift wages and benefits across industries. Total compensation for office workers, hotel and restaurant employees and construction workers, for example, all rose by 1.5 percent in the most recent quarter, outpacing overall growth of 1.2 percent, according to Friday’s employment cost index report. The data also shows that wage growth picked up in the first three months of 2023, after having slowed for three straight quarters.

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The recent spike in wages, which began in late 2020, comes after years of stagnation following the Great Recession. For years, pay growth held steady as employers had the upper hand. But that quickly changed during the pandemic, as widespread labor shortages forced employers to boost pay and other perks to attract and keep workers. Total compensation rose by 3.3 percent in 2021, and 4.9 percent last year.

Those gains have been particularly pronounced in low-paying sectors, such as leisure, hospitality and other service industries that are still struggling to find enough workers.

“Obviously from a worker’s perspective, making more money in your paycheck is always going to be a good thing,” said Cory Stahle, an economist at the jobs site Indeed. “But the Fed wants more of a balance: It wants people to still have money in their pockets, but not so much they go out and spend more, driving up inflation.”