The Fed has put markets on notice that another increase in interest rates could be expected this June or July. The Fed’s objectives are clear – full employment and stable inflation – but it continues to struggle between improvements in the unemployment rate yet slower than desired inflation. The puzzle is that lower unemployment should lead to higher inflation as employers increase wages and then raise prices to make up for the added cost. So, if unemployment is lower and inflation hasn’t picked up, then what is happening to wages and why do some at the Fed feel ready for the next increase in interest rates?

In short, one reason is that wages are beginning to grow faster, especially for low- and middle-wage jobs. The Atlanta Fed’s Wage Growth Tracker (WGT) has reached its highest post-recession level this April.

Click on chart for source.

The recent rise in the overall WGT has been driven by growth in wages for middle-wage jobs which are trending higher than high-wage jobs, a deviation from the historical picture. As noted by Ellen Terry at the Atlanta Fed, wage growth for low-wage jobs is back to its pre-crisis average, while wage growth for high-wage jobs is about 75% of its pre-recession average. Meanwhile, the unemployment rate for each job group continued to decline.

On the other hand, other indicators of wage growth do not reveal as positive of a picture. Growth in average hourly earnings (AHE) has been slower than that estimated in the wage growth tracker. The difference between AHE and WGT is that WGT is an estimate of the wage growth of continuously employed workers, while AHE looks at wages for anyone who is working at all.

Though many workers are those that are continuously employed, the effect of entry/exit into employment tends to drag down wage growth. The recent difference between AHE and WGT suggests that the magnitude of  entry/exit in the job market may be large (which could signal other issues depending on the sectors and types of workers). Ultimately, estimates of wage growth for the continuously employed provide a better indication of overall labor market strength.

Although it remains to be seen if faster wage growth for low- and middle-wage jobs will result in higher inflation for the economy, some at the Fed are optimistic enough to suggest a rate hike as early as June. A recent increase in the April inflation rate, a tightening labor market, a pick-up in oil prices and a dollar that has retreated help support the case that the time for another lift in interest rates might be sooner than previously expected . The condition would be for the economy to continue along as it is now, at least.

But as we experienced last September, “global economic and financial conditions” could alter the Fed’s assessment. The most significant foreseeable event that would call for patience in raising rates would be a vote in the UK on June 23 to leave the European Union. Reporting by the Financial Times says that Bill Dudley, President of the New York Fed, hinted “that the impending vote could be a swing factor determining whether the Fed goes in June or waits until July. The decision will depend in part on how likely an exit appears to be when it meets on June 14-15, and how the Fed thinks the markets would react if UK voters opted to leave the EU”.

Perhaps Britons will end up having a larger influence on the Fed than US wages.