Wages have lagged behind rising prices. However, cooling inflation along with planned pay hikes are reversing that trend.
Businesses Budget For Raises
Employers are budgeting wage increases of 4.3 to 4.6 this year, according to research by The Conference Board and WTW.
Wage hikes are a wave of the future, according to one survey.
“Driven by structural trends in the US labor market, wages may grow faster over the next decade compared with the previous one, and lead to a future of tight labor markets,” reports the Conference Board.
Reduced immigration and slowed growth in the working-age population are cited as forces tightening the labor market and contributing to wage growth.
More Than Money
Both reports note that those projected wage hikes could be adjusted depending on economic conditions. However, they also suggest that employers should offer more than pay raises to recruit and keep employees.
“With attraction and retention issues persisting, employers should consider the overall employee experience and not just salary increases,” said Lesli Jennings, North America leader, Work Rewards and Careers, WTW. “By focusing on health and wellness benefits, workplace flexibility, careers, and DEI, organizations can position themselves as the employer of choice for their current and prospective employees.”
As wages are heating up, inflation is cooling down.
The annual inflation rate for December declined for the sixth month in a row to 6.5 percent. That was a steep drop from 7.1 percent in November and the lowest since October 2021. However, inflation rose each month starting in March to a peak in June of 9.1 percent.
The latest Philadelphia Federal Reserve Bank Survey of Professional Forecasters reports that inflation is expected to decline further to 2.9 percent by the end of 2023.
Wages Heating Up
The Bureau of Labor Statistics (BLS) measures wage growth against the Consumer Price Index (CPI) each month to determine if wages are keeping up with inflation. The result is the BLS Real Earnings report.
Year over year in November, the BLS reports a .4 percent gain in hourly earnings. That came from a .3 percent increase in wages and a .1 percent decline in prices.
Cost of Goods Leading Cost of Services Lower
In a tale of two inflations, the cost of goods declined by .4 percent from October to November, while the price of services rose .4 percent, according to the Personal Consumption Expenditures (PCE)
“It’s all services inflation now,” MetLife Chief Market Strategist Drew Matus told Market Place. “And it’s going to be a battle between goods prices declining and service sector prices rising, and also how people choose to spend their money.”
Typically, service prices follow the price of goods.
“Price changes in the services sector tend to lag behind the goods sector,” according to Kiplinger, “so it is likely that services price inflation will ease if the economy slows as we expect.”
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