Wage Growth Surpasses Inflation for First Time in 2 Years

American workers are seeing an increase in their paychecks that surpasses inflation for the first time in two years, with inflation-adjusted average hourly wages rising by 1.2% in June, according to the Labor Department.

Federal Reserve Chair Jerome Powell welcomed the wage increases, especially for lower-income individuals, but emphasized the importance of controlling inflation.

“It’s great to see wage increases, particularly for people at the lower end of the income spectrum,” Powell told The Wall Street Journal. “But we want that as part of the process of getting inflation back down to 2%, which benefits everyone.”

Higher wages give Americans the opportunity to contribute to economic growth through increased spending and potentially help avoid a recession.

But wage growth also poses a challenge for the Federal Reserve in its efforts to control rising prices, and there are some concerns about a “wage-price spiral” (when rising wages lead to higher prices for goods and services).

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“The Fed does not want to repeat the mistake of the 1970s, when they stopped the tightening and inflation bounced back up,” Sung Won Sohn, professor of finance and economics at Loyola Marymount University and chief economist at SS Economics, told CNN.

While there are concerns about a wage-price spiral, research suggests that wage gains have had minimal impact on inflation, according to research from the Federal Reserve Bank of San Francisco.

The question also looms whether the recent gains will be short-lived. The June jobs report showed an increase in part-time employment due to slack work conditions (when there is a disparity between the amount of work desired by workers and the actual work opportunities available to them), which could potentially undermine the current wage gains. When there is an excess supply of labor or a shortfall in available work, employers have more bargaining power, and workers may face challenges in negotiating higher wages.

If that trend continues, and is not just a one-time occurrence, the wage increases we are currently seeing may not last long.

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However, overall labor market trends, including hiring activity and business budgets, are favorable for workers to sustain real wage gains. Job growth is still above pre-pandemic levels, and supply-side inflation has eased, giving companies more flexibility to pay workers.

“For the most part, this is still a tight labor market, still very low unemployment, still healthy business activity in lots and lots of industries where businesses have little choice but to staff up or at least maintain the staff they have,” Julia Pollak, chief economist with ZipRecruiter, told CNN.