How Wage Inflation Became the Fed’s Red Line |
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The 2021-2023 inflation surge saw sudden and persistent increases in prices for consumer goods, housing, and assets. Wage inflation also rose, but it lagged behind other inflation measures. When wages finally accelerated, the Fed began hiking rates to cool the economy, consistent with its longstanding view of wage inflation as a precursor to spiraling inflation and the need to suppress it.
At first glance, the average weekly wage for the last two decades appears strong, often outpacing general inflation. Data from the Center for American Progress indicate that workers, especially lower-income workers, have seen real gains between the COVID-19 pandemic and late 2024.
Yet these figures can be misleading. Recessions often skew the numbers because lower-paid workers are more likely to be laid off while higher earners remain, and new hires during recoveries can temporarily boost averages through starting pay or signing bonuses. Meanwhile, common inflation metrics like the consumer price index for all urban consumers can often........