Even as companies spend more on pay raises in a tight labor market, those increases aren't yet keeping up with inflation.
Overall salary boosts are forecast to be 4.6% in 2023, up from a mid-year estimate of 4.1% and higher than the 4.2% bump that workers got this year, according to a recent report from WTW, a business consulting company. The increase compares to 3.1% from 2018 through 2021.
While it's impossible to predict the pace of inflation next year, so far the blistering rate has meant that despite higher-than-normal pay increases, households are experiencing a loss of purchasing power.
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The latest inflation reading, based on the consumer price index — which tracks price changes across a variety of consumer goods and services — showed an increase of 7.7% in October from a year earlier. That is the smallest 12-month increase since January.
The Fed aims for a 2% annual rate of inflation
While inflation is a normal part of an economy, the current rate is far above the Federal Reserve's target of 2%.
So far this year, the Fed's rate-setting committee has boosted a key interest rate six times in its ongoing effort to bring down the rate of inflation. The general idea is that by raising the cost of borrowing money, spending will decline and there will be less inflationary pressure due to lower consumer demand.
This also can lead to job losses. Nevertheless, although there's been an uptick in layoffs, the unemployment rate is relatively low at 3.7%, according to the latest reading.
Boston Federal Reserve President Susan Collins expressed confidence Friday that inflation can be tamed without a big jump in unemployment.
"I remain optimistic that there is a pathway to re-establishing labor market balance with only a modest rise in the unemployment rate — while remaining realistic about the risks of a larger downturn," Collins said in prepared remarks for a Boston Fed economic conference.
While the job market could look different months from now, the current shortage of workers is a challenge for companies: 75% of the WTW survey respondents said they struggle with attracting and retaining talent, thus the bigger salary budgets. Employers also are providing more workplace flexibility (67%) and are placing a broader emphasis on diversity, equity and inclusion (61%).
"As inflation continues to rise and the threat of an economic downturn looms, companies are using a range of measures to support their staff during this time," said Hatti Johansson, a research director at WTW.
The WTW report is based on a survey conducted Oct. 3 to Nov. 4 and includes responses from 1,550 U.S. organizations.