Salary increases are less and less important. This could be a good thing for workers.
“If we have a wage-price spiral, the Fed really needs to put the brakes on,” said Dean Baker, senior economist at the progressive Center for Economic and Policy Research. « You can’t have that if wage growth is slowing, and it clearly is. »
« It takes a huge pressure off the Fed, » Baker said.
For now, that’s cold comfort for millions of Americans who see less and less money in their wallets after their monthly expenses. The trend has contributed to an austere national mood that could stoke fears of a looming economic crisis and weigh on Democrats’ prospects in the November election.
The latest Consumer Price Index report showed prices soared 1.3% in June alone from the previous month, partly reflecting a rise in gasoline prices that since started to decline. Senior administration officials told reporters on a call before the data was released that would mean any higher inflation numbers exaggerated what Americans are currently experiencing.
But while administration officials had hoped for good news in what is known as core inflation, which excludes more volatile food and energy prices, costs there also accelerated.
The Fed generally pays more attention to core inflation than the headline figure because it’s seen as a better indicator of where prices are headed, although Chairman Jerome Powell has warned that rising prices gasoline could fuel expectations of higher inflation.
The central bank also looks at wages.
Average salaries this year are up more than 5% from a year ago, the fastest pace since Ronald Reagan’s presidency. But it raised fears at the Fed that the trend could accelerate and spill over into price increases, which have already eaten away at those impressive gains. The steady decrease in the rate at which wages are rising could allay these fears.
In a note to reporters, White House National Economic Council Director Brian Deese and Council of Economic Advisers Chair Cecilia Rouse noted that the average hourly wage has risen at an annualized rate of 4.2% in the three months ending June, compared to 4.8% in the previous quarter and 6.1% in the last quarter of 2021.
The picture of inflation-adjusted wages « is terrible right now, » said Jason Furman, former chief economist to President Barack Obama and a professor at Harvard University. This is because people are getting increases much slower than prices are going up.
But slowing wage increases « could mean the Fed needs to raise less aggressively, so it can better preserve jobs, » Furman said.
Softening payroll data has bolstered optimism among some economists about the Fed’s ability to avoid triggering a recession. But an important element of this outlook is that inflation will have to come down further.
The central bank and other forecasters still expect some of the main drivers of the price spike – like supply chain grunts – to eventually fade, while global food prices and oil could stay high but stop rising. This, too, could help the Fed avoid having to cause a significant increase in unemployment in its fight against inflation. But nothing is guaranteed.
Arindrajit Dube, a professor at the University of Massachusetts at Amherst and a research associate at the National Bureau of Economic Research, said wages now appear to be rising at a reasonable pace that isn’t a problem from an inflation perspective.
« But if wage growth slows down a bit and inflation stays high, that’s not good for workers, » he said. « Threading the needle is what we would like to see happen. »
From the Fed’s perspective, officials do not want to see inflation become a more permanent feature of the economy through wage increases.
« If it’s not built into wages, it’s unlikely to be an ingrained phenomenon in the long run, » Dube said.