Recession in 2023 can be avoided if wage growth slows

Strong wage growth is normally a good thing for workers and a boon for the economy.

Now? Not so much.

Average wage growth is nearing its highest level in decades, fueling inflation, the Federal Reserve says. And that could force Fed officials to raise interest rates even more next year, risking pushing the U.S. into a mild recession.

Economists say moderating wage growth is key to avoiding a downturn.

But it may not be that simple.

What is the average salary increase in 2022?

Average annual wage growth fell to 5.2% in the third quarter from 5.7% early this year, according to the Labor Department’s Employment Cost Index. But that̵[ads1]7;s still well above the 3.3% average before the pandemic and about 2% in the decade before the health crisis.

Robust wage increases are usually a good thing. Since the covid crisis, however, they have not nearly kept up with inflation, which means consumers are losing purchasing power.

But the increase in wage growth contributes to inflation because employers with high labor costs usually raise prices to maintain profits.

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Meanwhile, the Federal Reserve has raised interest rates sharply to lower annual inflation that reached 9.1% in June before settling to a still high 7.1% in December.