MNI INTERVIEW: Atlanta Fed Tracker Shows Wage Growth Peaked

U.S. wage growth has peaked since June and should help cool services inflation, Federal Reserve Bank of Atlanta economist John Robertson told MNI, though there is still some upward pressure coming from higher earners.

The three-month moving average of wage growth for the median earner has dipped to 6.1% from a high of 6.7% in June, though that's still quite a bit above the 3.5% to 4% range seen in 2019. The Atlanta Fed wage tracker uses microdata from the Bureau of Labor Statistics' monthly household survey comparing wages of the same person 12 months apart.

The figures indicate a cooling in the BLS's employment cost index for the fourth quarter, a closely watched gauge of wage growth by Fed officials. ECI data is due Jan. 31 as the FOMC begins deliberations on the size of its next rate hike.

"It does look pretty clear now that wage growth peaked in the middle of 2022," Robertson said in an interview. "That's consistent with some indications that maybe labor market tightness has loosened a little bit. Given the stubborn piece of inflation is likely to be the services component and that’s closely tied to wage growth, lower wage growth could feed into lower inflation."

Top Fed officials in recent weeks have pointed to stickier services inflation as they argue rates must climb above 5% and remain there this year. Some investors are betting the Fed will see compelling evidence inflation is moving back to 2% and cut interest rates late this year. (See: MNI: Fed Rates Likely Headed Above 5% Despite Cooling CPI)

JOB SWITCHING FOR RAISES

Higher-earning workers are still experiencing an upward trend in wage growth, Robertson said, perhaps as they demand some of the pay bumps won by lower-paid workers early in the pandemic.

"I’m starting to see a leveling off of wage growth for the lowest paid workers but continuing upward trends in the upper parts of the distribution," he said. "That moderates the overall level of decline in wage growth."

Many workers still lost purchasing power as wage gains lagged inflation, he said.

Median inflation-adjusted wages fell 0.9% in 2022 and 2.3% in 2021, compared to 1.6% growth in 2019. Roughly half of the Atlanta Fed's sample saw rising real wages and the winners tended to be lower-paid workers who won a bigger raise by switching jobs.

The Atlanta Fed wage tracker measures wage growth over a 12-month period and is "a bit of a lagging indicator," Robertson noted. Average hourly earnings data in the monthly jobs report offers a more near-term view -- albeit with compositional distortions -- and tells a similar story, slowing to 4.1% in December on a three-month average annualized basis compared to 6% last January, he said.