A 2023 recession could be avoided if wage growth slows

Strong wage growth is usually a good thing for workers and a boon for the economy.

right Now? Not much.

Average wage increases are near the highest level in decades, fueling inflation, says the Federal Reserve. This could force Fed officials to raise interest rates more next year, which could push the US into a mild recession.

Economists say moderating wage growth is key to avoiding deflation.

But it may not be that simple.

What is the average wage increase in 2022?

Average annual wage gains fell to 5.2% in the third quarter from 5.7% early this year, according to the Labor Department’s Employment Cost Index. But this is still well above the average of 3.3% before the pandemic and about 2% in the decade before the health crisis.

Strong pay increases are usually a good thing. Since the COVID crisis, they have not kept up nearly as much with inflation, which means consumers are losing purchasing power.

But a sharp rise in wage growth contributes to inflation because employers with high labor costs usually raise prices to preserve profits.

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Meanwhile, the Federal Reserve sharply raised interest rates to lower annual inflation, which hit 9.1% in June before falling to 7.1% in December.

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