The Labor Department’s report on Friday showed that wage growth for private-sector U.S. workers remained strong in early 2023, with wages and salaries up 5.1 percent in March from a year earlier and up 1.2 percent from December. This growth rate was the same as in December and defied forecasters’ expectations of a modest slowdown. However, this news is likely to be a source of concern for Federal Reserve officials as they try to curb inflation without causing a recession.
The Fed has been raising interest rates for over a year in an attempt to cool down the economy and reduce inflation. Policymakers believe that the labor market, which has more job openings than available workers to fill them, is driving up pay at an unsustainable rate, contributing to inflation. They are trying to strike a delicate balance, raising borrowing costs enough to discourage hiring and ease pressure on pay, but not so much that companies begin laying off workers en masse.
The wage figures released on Friday suggest that pay is no longer rising as quickly as it was in the middle of last year, but it is still rising much faster than before the pandemic. This is a cause for concern for the Fed, which has been trying to balance the needs of workers with the need to curb inflation. Faster pay gains have helped workers, particularly those at the bottom of the earnings ladder, keep up with rapidly rising prices. However, if companies need to keep raising pay, they will also need to keep raising prices, making it difficult for inflation to return to the central bank’s target of 2 percent per year.
The results of the Fed’s efforts to reduce inflation have been mixed. Inflation has come down from its highs last year, but economic growth has slowed. Data released on Thursday showed that gross domestic product, adjusted for inflation, increased at just a 1.1 percent annual rate in the first quarter. Companies have begun posting fewer job openings, and previously overheated sectors of the economy, like housing and tech, have cooled dramatically.
Despite these efforts, inflation has come down more slowly than many forecasters had expected, and many economists say that while the labor market may no longer be boiling over, it is still at an uncomfortably high simmer. The wage data released on Friday has erased any remaining doubts about the Fed’s decision to raise interest rates again at their meeting next week, according to Omair Sharif, founder of Inflation Insights.
Overall, the strong wage growth is good news for workers trying to keep up with the rising cost of living, but it poses a challenge for the Fed as it tries to strike a balance between the needs of workers and the need to curb inflation. The labor market remains a key driver of inflation, and the Fed will need to continue monitoring wage growth closely as it tries to achieve its inflation targets.