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Americans’ Wages Are Finally Outpacing Inflation. Here’s Why It May Not Last

US wages have been on the rise, but it sure hasn’t felt like it. For more than two years, persistent and pervasive inflation has taken big bites out of Americans’ paychecks.

That’s finally starting to change now that inflation is waning.

In June, for the first time in 26 months, US workers’ real weekly earnings (a week’s worth of wages adjusted for inflation) grew on an annual basis, according to data released this week from the Bureau of Labor Statistics. Annual real weekly wages were up 0.6% last month, a rate that’s a tick below the 0.7% gain seen in February 2020.

June also marked the second consecutive month of year-over-year real hourly wage growth — the first back-to-back months of gains since early 2021.

“The big problem for most consumers is when wage increases do not keep pace with inflation, then we lose real purchasing power,” said William Ferguson, the Gertrude B. Austin professor of economics at Grinnell College in Iowa. “And that’s actually what hurts people.”

Although long overdue, this development is landing at a sticky time in the economy and the Federal Reserve’s knock-down-drag-out fight to tame inflation. The Fed has been laser-focused on dampening demand, and central bankers have frequently noted they’re keeping close watch on how much wage growth could stoke that demand and, in turn, inflation.

Alternatively, if a cooling labor market turns frigid, that could also make this recent growth short-lived.

“If inflation is moderate and the labor market is very strong, it’s a reason for vigilance, but it’s not a reason on its own to continue hiking,” said Alex Pelle, Mizuho Securities US economist. “It’s one of those things that you need to watch, because there’s the argument that will add to inflationary pressures.”

A watchful eye on wage gains

The Fed is in the midst of a wait-and-see period. After 10 consecutive rate hikes in 15 months, the Fed’s policymakers in June voted to hold the benchmark rate steady so they could evaluate the effects of the tightening to date, as well as the activity within the banking sector and broader economy.

Although the major economic reports of the past two weeks did show key data was moving in the preferred direction — slowing job growth, a slight slackening within the labor market, cooling consumer price inflation and practically flat producer prices — markets largely expect the Fed to continue with a well-telegraphed quarter-point increase when it meets later this month.

“The Fed does not want to repeat the mistake of the 1970s, when they stopped the tightening and inflation bounced back up,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University and chief economist at SS Economics.

Fears of a dreaded “wage-price spiral” — when rising wages and prices feed into each other — have made a bogeyman out of wage growth. However, recent economic research from the likes of the San Francisco Fed and former Fed chair Ben Bernanke noted that wages gains have had little, and certainly not overwhelming, effects on this inflationary cycle.

Wage gains “will fuel spending, and I do think it will be something that keeps a floor on inflation that’s above [the Fed’s target of] 2%, but let’s see how it evolves over time,” Pelle said. “I don’t want to jump the gun and say absolutely that this is something that the Fed needs crushed.”

Room for continued growth

If a data point from the June jobs report proves to be a trend and not a one-month blip, the wage gains seen now could be short-lived.

In June, the number of people employed part-time for economic reasons grew by 452,000 to 4.2 million, an increase that was partially reflective of people “whose hours were cut due to slack work for business conditions,” the BLS noted.

Still, the broader labor market trends, including hiring activity, labor movements and businesses’ budgets are favorable to workers maintaining these real wage gains, said Julia Pollak, chief economist with ZipRecruiter.

Job growth is slowing somewhat, but the gains are still above pre-pandemic averages as companies continue to backfill shortfalls left by the pandemic and respond to continued demand. Also, some workers who have felt they’ve been given short shrift or are discouraged about two years of negative real wages are responding with labor strikes, she noted.

And finally, supply-side inflation has drastically cooled to the point where annual inflation is practically flat — which, ideally, gives firms more wiggle room to pay workers, she said.

“For the most part, this is still a tight labor market, still very low unemployment, still healthy business activity in lots and lots of industries where businesses have little choice but to staff up or at least maintain the staff they have,” she said.

Source : CNN