Will US Wage Growth Lead to Increased Interest Rates?

In December 2018, average hourly earnings in the United States increased by 3.2 percent from December 2017, the highest rate increase since May 2009. In addition, due to low inflation American workers saw the largest improvement in real hourly earnings since August 2016. Wages grew because the labor market tightened, as indicated by the historically low unemployment rates.

Since rising wages, in general, mean higher inflation, the Federal Reserve may respond by increasing interest rates to stall business demand for labor and, consequently, wage growth. The Fed increased rates four times last year. Yet given current conditions, including inflation that’s within the Fed’s target range, slowing global growth, and a strong labor market, the central bank may opt to postpone another hike. If the Fed keeps interest rates flat in 2019, watch for continued record growth in real wages.