Economy Update: Real Wage Growth Stagnates Despite Inflation Decline!

Atlanta, Georgia – Inflation rates have been a topic of concern for economists and policymakers in recent years, with a surge in consumer prices leading to fears of a wage-price spiral. As the Consumer Price Index (CPI) hit a 40-year high of 9 percent on a year-over-year basis, concerns grew about the impact on real wage growth and the potential challenges for monetary policy.

The initial surge in inflation was followed by a rapid cooling off period, with inflation trending around 3 percent by June 2023. Real wage growth began to show signs of improvement, turning slightly positive as the year-over-year growth rate in real average hourly earnings started to increase. However, real wages have still not fully caught up to the level seen before the inflation surge in early 2021.

One explanation for the slower growth in real wages could be the rapid increase in interest rates by monetary policymakers, which may have helped to stabilize inflation expectations. Additionally, changes in work patterns, such as the shift to remote work, have played a role in moderating wage growth pressures.

Research has shown that the rise in remote work opportunities has contributed to curbing wage growth, with some firms reporting a significant offset to the anticipated real-wage catch-up. This shift in work dynamics has had a measurable impact on wage growth expectations, with firms projecting slower wage growth rates in the coming months.

Looking ahead, firms anticipate that wage pressures will continue to slow, with average wage growth expected to be around 3.6 percent over the next year. While real wages have not yet returned to pre-inflation levels, the data suggests that it may take some time before they catch back up to previous trends. The ongoing shift to remote work may have led to a permanent adjustment in wage growth dynamics, highlighting the need for continued monitoring and adaptation in the labor market.