Wage growth in the US is slowing and not keeping pace with inflation

  • US wages and salaries growth slowed to 1% in the fourth quarter of 2022, compared to 1.3% in the previous quarter.
  • However, wages and salaries actually fell by 1.2% for all of 2022 due to high inflation.
  • As inflation remains high, the Fed could hike rates further – meaning wage growth could continue to trend slower.

U.S. wages rose slightly in the fourth quarter of 2022 — but that still meant a pay cut as wage increases failed to keep pace with rising inflation.

Civilian wages and salaries rose 1% sequentially in the fourth quarter, the Bureau of Labor Statistics said in a report Tuesday. Wage growth slowed from 1.3% in the third quarter of 2022 – but total wages still rose 5.1% for the full year.

In real terms, however, wages and salaries fell by 1.2% throughout 2022 thanks to high inflation rates.

U.S. consumer inflation rose 6.5% year-on-year in December — and while it was a seasonally adjusted 0.1% lower between November and December, it’s still well above the Fed’s target rate of 2% — meaning that it harms purchasing power and personal finances.

The Federal Reserve will be closely monitoring this data ahead of its first meeting of 2023 on Tuesday and Wednesday.

The central bank is expected to release its latest rate decision at 2pm ET on Wednesday, and analysts polled by Reuters expect the Fed to hike rates by 25 basis points this time. The federal funds rate is currently in the 4.25% to 4.50% range.

Higher interest rates make it more expensive to borrow for everything from mortgages to credit cards. And it encourages people to save rather than spend, which in theory helps drive prices down — and in turn, keeps wages down.

Workers’ compensation is key to the Fed’s monetary tightening cycle as rising wages contribute to inflation. Some economists worry that current market conditions could lead to a wage-price spiral, a vicious circle of broad price hikes leading to wage increases, which in turn boost consumption and actually worsen inflation.

Fourth-quarter wage moderation suggests the Fed will scale back its aggressive rate hikes to 25 basis points from 50 basis points in December, said Vishnu Varathan, head of economics and strategy in Mizuho Bank’s Asia Pacific Treasury division. it said in a statement on Wednesday.

But that doesn’t mean the Fed will give up raising rates because inflation remains high.

“To be clear, evidence of easing inflation and wage pressures over the past few months is merely bolstering confidence to slow the pace of rate hikes and is not catalyzing an end to the tightening cycle,” Varathan added.

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