U.S. Wages Still Rising Briskly, Employment Holding Up, and Inflation Still Sticky (Probably)

Look through the noise attributable to the government shutdown, and little has changed over the past six months.

The typical American worker’s wages have consistently been rising about 4% a year since early 2023, compared to about 3% a year in 2018-2019. That difference is not large, but it is large enough to explain why inflation is still running about 1 percentage point faster (annualized) than before the pandemic. The latest data—which (sort of) cover November, but mostly exclude October—do not meaningfully change the picture.

That is not necessarily a problem that justifies tightening monetary policy from here. As many people argued persuasively at the time, nominal income growth was too slow in the years before the pandemic. But the data imply that the burden for loosening policy should be high, especially given the latent risk that inflationary policy shocks start changing the behavior of consumers and businesses.

Lowering interest rates could make sense if the job market were clearly in danger of rolling over. It is also possible that lower rates could be appropriate if the “neutral” level had suddenly dropped, perhaps due to changes in population growth associated with net immigration. As of this writing, however, the job market still looks relatively healthy, or at least no less healthy than it did a few months ago. And while it is definitely possible that the reversal of the immigration influx of 2022-2024H1 will lower longer-term growth prospects, and therefore reduce the set of interest rates that would lead to the “optimal” mix of saving vs. spending out of income, it is also possible that the impact will be overwhelmed by enthusiasm about the potential productivity gains to be generated from investments in data centers and AI research.

The Impact of the Shutdown on Data Collection

The Bureau of Labor Statistics (BLS) was not able to do any work between October 1 and November 12 because of the federal government shutdown. That distorted much of the most recent data, and it may continue to distort some data in future releases.