Is Nominal Wage Growth Starting to Slow?
The April numbers suggest that the recent slowdown in average hourly pay growth since January could be something more than a fluke. That would be a big deal.
U.S. inflation may be much closer to normalization than I had previously thought.
While it is too early to say it conclusively—among other things, the most recent numbers could be revised—the past few months of data on hourly wages are looking more and more like a break from the 2022H2-2023 pattern in which nominal wages steadily grew faster than what would be consistent with 2% yearly price increases.1
Why Nominal Wage Growth Matters
Most consumer spending is financed out of workers’ wages. And most businesses’ revenues either come directly from selling to consumers, or come from selling goods and services to other businesses that sell to consumers. So changes in wages tend to be a good proxy for changes in economy-wide income and spending. The passthrough from wages to inflation is sensitive to many factors, but the link is generally strong enough that the gap between average full-time equivalent wage growth and inflation is usually no more than a couple of percentage points.
This is why so many analysts devote so much effort to tracking wages and all the forces that can affect wages, such as the strength of the job market. My belief that nominal growth and inflation would remain persistently faster than before the pandemic—a belief I have held in varying forms since the end of 2022—was based on the the data I was seeing on workers’ incomes, as well as the apparent disconnect between measures of job market churn and wage growth. And as I have noted before, monthly changes in average hourly pay for the typical worker (non-managers outside of retail, leisure, and hospitality) had been remarkably stable from mid-2022 through February 2024.
We have only had two months of data since then—and they may get revised—but in that context, the latest numbers are striking.
New (Old) Normal?
This is the current picture of monthly (annualized) changes in the typical worker’s hourly pay since mid-2022. While there was a pop in wage growth in January, which may have been a fluke attributable to the decline in hours and bad weather that affected large swathes of the country, nominal wage growth in the first four months of 2024 has nevertheless been substantially slower than in 2022H2-2023.