A 2023 recession could be avoided if wage growth slows

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

Now? Not so much.

The Federal Reserve says average wage growth is near its highest level in decades, fueling inflation. And it could force Fed officials to raise interest rates even more next year, which risks pushing the US into a mild recession.

Economists say that moderation in wage growth is playing an important role in avoiding recession.

But it can’t be that simple.

What is the average salary increase in 2022?

According to the Labor Department’s Employment Cost Index, the average annual wage gain fell to 5.2% in the third quarter from 5.7% at the beginning of the year. But it is still up from an average of 3.3% before the pandemic and about 2% in the decade before the health crisis.

Strong pay growth is usually a good thing. However, since the COVID crisis, they have not nearly kept pace with inflation, meaning consumers are losing purchasing power.

But the increase in wage growth is contributing to inflation because employers with higher labor costs usually raise prices to maintain profits.

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Meanwhile, the Federal Reserve has sharply raised interest rates to try to tame annual inflation, which hit 9.1% in June, before sliding down to 7.1% in December.

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