Americans’ wages are finally outpacing inflation. But could it last?

Minneapolis
CNN
—

American wages have been on the rise, but it certainly hasn’t felt like it. For more than two years, persistent and pervasive inflation has taken large chunks of Americans̵[ads1]7; paychecks.

That is finally starting to change now that inflation is slowing.

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

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

“The big problem for most consumers is when wage increases don’t keep up with inflation, 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, these developments come at a difficult time in the economy and the Federal Reserve’s knock-down-drag-out battle to tame inflation. The Fed has been laser-focused on curbing demand, and central bankers have often noted that they are keeping a close eye on how much wage growth can stimulate that demand and, in turn, inflation.

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

“If inflation is moderate and the labor market is very strong, that’s a reason for vigilance, but it’s not a reason in itself to keep going,” said Alex Pelle, Mizuho Securities US economist. “It’s one of those things you have to look at, because that’s the argument that will increase inflationary pressures.”

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

Although the major economic reports of the past two weeks showed key data moving in the preferred direction—slowing job growth, a slight slowdown in the labor market, cooling consumer price growth and virtually flat producer prices—markets largely expect the Fed to continue with a good 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 tightening and inflation rebounded,” said Sung Won Sohn, professor of finance and economics at Loyola Marymount University and chief economist at SS Economics.

Fear of a dreaded “wage-price spiral” – when rising wages and prices feed into each other – has turned wage growth into a failure. However, recent economic research from the likes of the San Francisco Fed and former Fed Chairman Ben Bernanke noted that wage increases have had little, and certainly not overwhelming, effects on this inflation cycle.

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

If a data point from the June jobs report turns out 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 working part-time for economic reasons grew by 452,000 to 4.2 million, an increase that partly reflected 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 corporate budgets, are favorable to workers maintaining these real wage gains, said Julia Pollak, chief economist at ZipRecruiter.

Job growth is slowing somewhat, but gains are still above the pre-pandemic average as companies continue to fill post-pandemic shortfalls and respond to continued demand. Also, some workers who have felt shortchanged or are discouraged by two years of negative real wages are responding with strikes, she noted.

And finally, supply-side inflation has cooled drastically to the point where annual inflation is virtually flat — ideally giving companies 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 many industries where companies have little choice but to staff up or at least maintain their employees,” she said.