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Worker pay is still going up fast — and that means higher interest rates

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Rising pay is usually a good thing for workers and the economy, but right now higher wages might be too much of a good thing.

Why? Bigger paychecks are adding to inflation and making it harder for the Federal Reserve to get prices under control.

As a result, the Fed is likely to keep raising interest rates to slow the economy and thereby raise the risk of recession.

The June U.S. employment report underscores the Fed’s dilemma.

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Read: U.S. adds just 209,000 jobs in June, but smallest gain since 2020 is unlikely to cancel Fed hike

Hourly wages rose 0.4% for the third month in a row, the government said Friday. That left the increase over the past year at 4.4%, almost double the prepandemic norm.

Not only that, but wage growth appears to have gotten stuck between 4% and 5% after a sharp slowdown last year.

U.S. inflation has also gotten stuck in the 4% to 5% range — and high wage growth is part of the reason. Labor is the single biggest expense for most businesses.

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“Wage gains are still too strong,” said Stuart Hoffman, senior economic adviser at PNC Financial Services.

That’s not the kind of thing workers want to hear. After all, bigger paychecks have helped Americans cope with rising prices.

In a best-case scenario for the Fed, the economy would slow enough to reduce the demand for labor, ease the upward pressure on wages and reduce the inflation rate back to the central bank’s 2% target.

The Fed is far from achieving its goal, however, and the only way it might do so, economists say, is by raising rates further.

“I don’t know how you get wage growth below 4% until you have a much weaker jobs market,” Hoffman said. “And I don’t know how you get a much weaker jobs market without a mild recession.”

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