The Bush administration said yesterday that wages were reaching a "tipping point", after official figures showed average US earnings rising at the fastest pace in almost five years.
Wages were up by 3.8 per cent over the year to April, despite unexpectedly slow employment growth of just 138,000. Economists had been expecting an increase of 200,000.
The US treasury said that rising wages and an increase in hours worked suggested that the economy remained in a "sweet spot".
With inflation expected to be around 3.4 per cent in April, wages seem to be outpacing rises in the cost of living for the first time since early 2004. "We are approaching the tipping point where we will see wages pick up," said John Snow, the US treasury secretary.
He said president George W Bush's first-term tax cuts had been at the centre of this achievement and urged congress to extend the lower tax rates on capital gains and dividends, due to expire at the end of 2008.
The rise in wages leaves the Federal Reserve with a delicate balancing act, catching the central bank between slowing employment growth and the potential inflationary dangers of rising costs to companies.
But economists said the Fed was still expected to raise rates for the 16th consecutive time to 5 per cent at its meeting on May 10.
US stocks and bonds rallied on the data and the dollar fell more than half a cent to a new year-low against the euro at $1.2765.
Although wages have started to rise more briskly, the cost to companies of employee benefits appears to be coming under control. This may contain the need for companies to increase prices.
Paul Ashworth, an analyst at Capital Economics, said there was no need to start worrying yet that wages would push up inflation.
"Firms might be willing to cut profit margins, which are at very high levels, before raising prices in order to keep their market share."
The unemployment rate was stable at 4.7 per cent, but the average working week rose from 33.8 hours to 33.9.
- (Financial Times service)
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