The King Who Poured Oil on Prices... Peaked in the US and Europe and Is Now Declining

US Nonfarm Workers' Hourly Wages Rise 5.6%→4.4%
Major European Countries' Wages 5.2%→4.9% ↑
Is the Tightening Pause Near?

[Asia Economy Reporter Haeyoung Kwon] It has been revealed that wage growth rates in advanced countries have peaked and are now on the decline. This signals a calming of wage-driven inflation, strengthening expectations that major countries, including the United States, are nearing the end of their tightening cycles.

According to the Wall Street Journal (WSJ) on the 19th (local time), the average hourly wage growth rate for U.S. nonfarm workers decreased from 5.6% year-over-year in March last year to 4.4% in January this year. This is significantly lower than last month’s inflation rate of 6.4%. Despite the U.S. labor market remaining robust with severe labor shortages and historically low unemployment rates at 'full employment' levels, nominal wage growth has rapidly slowed since mid-last year.

Europe is no exception. According to the Central Bank of Ireland, wage growth rates in six major European countries slowed from 5.2% in November last year to 4.9% in December. This is about half of the 9.2% inflation rate in the Eurozone last year.

This decline in wage growth is closely related to the easing of inflation. As energy prices fell and supply chain disruptions eased, inflation in major countries peaked last summer and fall before declining, which reduced wage pressure. The economic slowdown that began in the second half of last year and the resulting increase in layoff threats also led workers to moderate their demands for large wage increases. Although there were concerns about a vicious cycle where wages push prices up and prices push wages up again, it is now analyzed that wage-driven inflation has started to subside.

Globally, wage growth has failed to keep pace with inflation, causing real wages to actually decline. The WSJ cited a report from the International Labour Organization (ILO) stating that inflation-adjusted wages in major countries fell below pre-COVID-19 pandemic levels of 2019. Although wage growth last year was higher than in the previous two years (2020?2021), it was insufficient to match inflation rates in major countries.

According to the Organisation for Economic Co-operation and Development (OECD), real wages in countries including South Korea (-1.8%), the U.S. (-0.6%), Canada (-2.1%), Germany (-2.6%), the U.K. (-2.9%), Japan (-0.3%), and Australia (-2%) decreased compared to the previous year. WSJ analyzed that as wage growth lags behind inflation, the labor market’s share in economic output is gradually shrinking in major economies.

The WSJ stated, "There are no signs of a vicious cycle where wages push prices up and prices push wages up again," and predicted, "Inflation is likely to ease without a significant rise in unemployment."

Although various economic indicators are mixed, attention is focused on the timing of major central banks halting interest rate hikes as wage-driven inflation, a key inflation risk factor, slows. The Bank of Canada raised its benchmark interest rate to 4.5% last month and became the first major central bank to announce a pause in rate hikes, citing the slowdown in wage growth as a key reason for the pivot in monetary policy. Tiff Macklem, Governor of the Bank of Canada, stated, "Wage growth has plateaued at 4?5%. The risk of wage-driven inflation is gone." The WSJ explained, "News that wage growth in advanced countries is stagnating or declining is good news for central banks."

However, real wages are expected to rise this year compared to last year. With inflation under control in major countries and the possibility of a 'no landing' scenario for the U.S. economy?meaning no severe recession?workers may demand wage increases.