The recent rise in worker pay is slowing after hitting a 40-year high — and that might help keep the U.S. out of recession.
The average gain in hourly wages was a modest 0.3% in December. That’s the smallest rise in almost a year.
As a result, the increase in wages over the past 12 months slowed to 4.6% from 4.8% in the prior month.
That’s the smallest year-over-year increase in a year and a half and represents a big drop from a peak of 5.6% last March — the highest rate since 1982.
Why is this good news, especially with inflation outstripping the increase in wages?
The Federal Reserve is worried high wage growth will prolong a bout with elevated inflation. If wage growth slows, Fed officials believe, it will be easier to subdue high inflation.
The central bank’s aim is to restore the annual rate of inflation to prepandemic levels of 2% or less. Prices soared after the onset of the pandemic, and the inflation rate topped 9% last year, as reflected in the consumer price index.
The rate of CPI inflation was still 7.1% as of November, but it clearly appears to have peaked.
In the Fed’s ideal scenario, annual wage growth would slow to around 2.5% to 3% and put it back to where it was before the pandemic was declared in early 2020.
If inflation also slowed to 2% or so, workers could start getting ahead again. Inflation is still rising faster than incomes.
The one potential obstacle to the Fed’s dreamy scenario is the tightest labor market in decades, if not in U.S. history. Labor is so scarce that companies have had to pay a lot more to attract and retain employees.
“Nothing here suggests that demand for labor has meaningfully declined, even though payroll growth has decelerated,” economists Thomas Simons and Aneta Markowska of Jefferies told clients in a note. “The bottom line is that payroll growth isn’t slowing fast enough, and neither is wage growth.”
To ensure wage growth continues to slow, the Fed still wants to see the number of job openings fall, hiring decline and unemployment rise a bit.
The jobless rate fell to 3.5% in December to match a 54-year low, underscoring just how hard it is for would-be employers to find labor.
The Fed predicts unemployment will rise as high as 4.6% later this year owing to the steep increase in interest rates orchestrated since last spring by the central bank. Higher borrowing costs tend to reduce inflation by depressing demand for labor, goods and services — in effect, slowing the economy.
But if wages and inflation continue to decelerate, economists say, the Fed won’t have to raise rates quite as high or keep them high for quite as long.
“Wage growth is slowing, which will take some pressure off inflation, and could slow Fed rate increases,” said Robert Frick, corporate economist at Navy Federal Credit Union.
If that’s the case, the U.S. economy might avert a recession.
Opinion: The jobs report confirms that the soft landing has arrived — if the Fed has the wisdom to embrace it
“The probability of a soft landing has increased compared to where it was in the fall of 2022, where it was looking more questionable,” said St. Louis Fed President James Bullard, referring to a Goldilocks scenario in which the Fed successfully vanquishes high inflation while avoiding recession.
Read on: Fed’s message to stock market: Big rallies will only prolong painful inflation fight
This post was originally published on Market Watch
