Recent data indicates that Americans' paychecks experienced a notable uptick in growth for the first time in several months. This development is particularly encouraging for workers, given the challenges posed by the rising cost of living in recent years. However, the accelerated wage growth also hints at underlying inflationary pressures, which may deter the Federal Reserve from considering interest rate cuts in the near future.
In May, workers earned an average of $34.91 per hour, marking a 0.4% increase from April, equivalent to a 14-cent rise. Compared to the same period last year, average hourly earnings saw a more substantial uptick of 4.1%.
Despite this positive trend, wage growth has been on a downward trajectory over the past year, notably falling below the nearly 6% annual increase recorded in March 2022. While this sustained wage growth has bolstered Americans' financial well-being, it poses a challenge for the Fed as it could impede inflation from approaching the central bank's 2% target. High labor costs have the potential to be passed on to consumers, although robust wage gains can coexist with low inflation if labor productivity remains robust. The sustainability of last year's productivity surge in the current year remains uncertain.
Even if wage growth decelerates in the upcoming months, it still surpasses pre-pandemic levels. Between 2007 and 2020, prior to the pandemic-induced economic disruptions, year-over-year wage growth never exceeded 3.7%.
