Wages are growing steadily, defying the Fed’s hopes as it fights inflation

Wage growth picked up in April, good news for American workers but bad news for Federal Reserve officials, who hoped for a steady moderation in wage increases as they tried to bring inflation back under control.

The average hourly wage rose by 4.4 percent in the year to April. That compared to 4.3 percent in the previous month, more than the 4.2 percent economists had expected.

The increase in wages compared to the previous month – at 0.5 percent – was the fastest since March 2022.

The hourly wage measure can fluctuate from month to month, so it’s possible that the rise in April is a dip rather than a reversal in the trend towards cooler wage increases. Still, the data underlined that the Fed faces a bumpy road as it attempts to slow the economy and bring inflation under control.

Fed officials are closely watching the pace of wage growth as they try to assess how quickly inflation is likely to ease. While officials regularly acknowledge that wage increases did not initially drive rapid price increases, they worry that it will prove difficult to bring inflation back to normal with wage increases rising so quickly.

Companies can charge more to cover their climbing labor costs. And when households earn more, they’re better able to keep up with higher spending without cutting spending — allowing businesses to charge more for hotel rooms, child care, and restaurant meals without scaring off consumers.

As of March 2022, the Fed has raised interest rates at its fastest rate since the 1980s. Officials this week raised borrowing costs to about 5 percent and indicated they could pause their rate moves once their meeting takes place in June, depending on incoming economic data. .

Fed Chairman Jerome H. Powell noted at his press conference this week that wage growth has remained strong. He suggested that the solid labor market was one reason why the Fed would likely keep rates high to continue slowing the economy “for a while” as it tried to wrestle inflation, which remains above 4 percent, back to its target. central bank target of 2 percent.

“Right now you have a labor market that is still extremely tight,” he said, noting that a more dated wage figure released last week was “a few percentage points higher than what would be consistent with 2 percent inflation in over time.”

That measure, the Employment Cost Index, showed that wages and salaries for U.S. private sector workers were up 5.1 percent in March from a year earlier. While that’s slightly faster than the gains reported by the overall average hourly earnings figures for April released Friday, it’s roughly in line with a closely monitored metric in the monthly jobs report that tracks wage increases for regular workers.

Pay for production and non-supervisory employees – essentially people who are not managers – increased by 5 percent in the year through April, Friday’s report showed. That number has continued to moderate gradually, even as the slowdown in the overall index has stalled.

Fed policymakers still have a month’s worth of job and wage data before making their next rate decision on June 14, making Friday’s numbers just one of many factors likely to determine whether they pause rate hikes or continue with more policy adjustments. Officials will also have more evidence of how much the recent banking sector turmoil is slowing the economy before they meet again.

A string of high-profile bank failures has spooked investors and could lead to caution among lenders across the country, making it harder to get loans for construction projects and mortgages and curbing growth – but it’s unclear so far how large that effect will be.

Perhaps most importantly, officials will receive new inflation numbers for their next decision.

“They’re going to have to see the inflation data and process it holistically,” said Kathy Bostjancic, chief economist at Nationwide. She said the strong jobs numbers were just a month’s worth of data, but were “shocking” to see at a time when economists were looking for a slowdown.

“Assuming inflation rates continue to fall gradually, I think they could be put on hold in June,” she said of the Fed. “But it will depend on inflation readings.”