Wage Growth Moderation: A Growth-Friendly Inflation Signal

This persistent nominal wage outpacing inflation marks a foundational shift supporting sustainable growth.

Wage gains have become increasingly real and durable. From July 2024 through July 2025, U.S. average weekly earnings climbed 4.2% nominally, comfortably ahead of the 2.7% rise in consumer prices. This delivered workers an $18 weekly gain in purchasing power. Crucially, this represents the 13th consecutive month where wages grew faster than inflation, demonstrating a sustained improvement in worker compensation relative to living costs.

Earlier labor market data provides context for this improvement. Looking back a year, from May 2024 to May 2025, U.S. real average weekly earnings rose 1.5%, driven entirely by a 1.4% increase in real hourly earnings. Importantly, this growth occurred without any change in average work hours, indicating productivity kept pace without triggering wage pressures that fuel price rises. This pattern suggests the labor market is strengthening without overheating.

While the gains are real, they remain modest compared to the pandemic-era surges. Historical data shows nominal wages have outpaced inflation only 71.9% of the time since 2006, meaning periods of real wage growth are still relatively rare. The current trend, therefore, is a positive development. However, businesses face ongoing pressure to manage higher labor costs, particularly in sectors reliant on hourly workers, and the sustainability of this wage-inflation gap remains subject to broader economic shifts.

Labor Market Cooling and Policy Implications

The modest wage growth trend highlighted in the previous section now finds supporting evidence in broader labor market conditions. These indicators suggest the Federal Reserve has more room to pursue growth-friendly monetary policy.

The unemployment rate rose to 4.2% in Q4 2024, up from 3.8% in Q4 2023, with most of the increase occurring early in the year. The employment-population ratio also declined slightly to 59.9% during this period.

This cooling trend in labor market tightness could ease inflationary pressures.

Notably, the unemployment rise was concentrated among women, which may signal sector-specific challenges rather than broad weakness. Meanwhile, labor force participation held steady at 62.5%, preventing deeper concerns about discouraged workers leaving the job market.

Wage growth has remained contained at 1.4% real hourly earnings growth between May 2024 and May 2025, with no increase in average work hours. This moderation aligns with the unemployment data, reducing fears that compensation pressures could reignite inflation. The Fed will likely view these combined trends as justification for easing policy.

The September meeting represents a critical test point for whether these labor market signals translate into actual rate cuts. While the current data suggests growth-friendly conditions, the demographic skew in job losses warrants monitoring. If female unemployment persists above trend or wage growth accelerates, the Fed may delay action despite the broader cooling narrative.

Sectoral Risks and Guardrails

Persistent real wage gains continue to fuel sector-specific inflation risks. August's earnings data revealed particularly strong gains in construction, information, and professional services sectors, with growth rates exceeding the overall private sector average by significant margins. These imbalanced gains create pricing pressures in those industries, potentially feeding broader inflation.

The supply-side constraint risk noted earlier remains a key concern. When wages surge sharply in specific sectors like construction or information technology, businesses often struggle to find qualified workers quickly. This tightness can force price increases on goods and services requiring those scarce skills, creating a wage-price spiral in affected areas. The $18 weekly real wage gain measured over the past year demonstrates substantial purchasing power growth, but its uneven distribution across sectors amplifies these localized inflationary dynamics.

October's jobs report will be a critical watchpoint. Sustained high wage gains in these outlier sectors, combined with the broader labor market strength, could indicate persistent inflationary inertia. Policymakers will need to monitor whether these trends spill over into other price categories or if wage growth continues to moderate as the labor market stabilizes.