Wage growth for U.S. workers has slowed significantly since the pandemic period, while inflation remains high, a trend that is adding to economic pressure.
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Americans are once again facing paychecks as inflation rises again, outpacing wage growth, further straining consumers’ wallets.
Heather Long, chief economist at Navy Federal Credit Union, told CNBC that “a significant number of Americans are worse off, and their incomes are not keeping pace with current price increases.”
Consumer prices rose 3.4% in August from a year earlier, according to data released Friday by the U.S. Bureau of Labor Statistics.
Meanwhile, average hourly wages rose just 3.1% over the same period, according to a separate BLS report released Friday. Real average hourly wages after adjusting for inflation were down 0.1% from July and 0.3% in August from a year earlier.
The gap between inflation and wage growth is a stark reminder that workers are losing purchasing power.
“Basically what we’re saying is that inflation is wiping out wage increases,” Long said, adding that April marked a clear turning point after a long period in which wage growth generally outpaced inflation.
From May 2023 to around April this year, worker employment was gradually recovering.
In fact, when Mr. Long first began charting the relationship between inflation and wage growth, it was to make the opposite argument: that conditions were improving, and that even though Americans at the time were dissatisfied with rising overall price levels, wages were gradually catching up.
But that progress began to reverse this spring as energy costs soared.
“It’s just hard to see. Things were improving, and now that improvement has exploded,” she said.
Energy continues to be a major source of pressure, with gasoline prices rising 3.9% in August alone, accounting for more than a third of the rise in the consumer price index. Diesel prices hit $6 a gallon for the first time on Friday amid fuel supply disruptions due to wars in Iran and Ukraine.
Professor Long links changes in household finances to the rise in energy prices following the Iran war. The Navy previously estimated that gas prices rose 21% in March, pushing the measured cost of car ownership to record levels.
“It will be difficult for a long time.”
Long said it was unlikely that inflation would fall significantly amid continued geopolitical pressures, especially as wage growth slows.
“It’s going to be tough for a long time,” she said.
She believes the best outcome is for wage growth and inflation to converge again around early 2027. “But if inflation equals wage growth, it’s still going to be pretty miserable on Main Street,” Long said.
The lingering pressure on purchasing power is already beginning to show up in consumer spending. Consumer spending accounts for about two-thirds of U.S. economic activity, and Long expects households will become more cautious with their budgets as their paychecks are cut and they buy less.
Consumers are adjusting
The strain and changes in consumer spending habits are beginning to show in the data.
According to YouGov data, high-income shoppers are more likely to buy their groceries at Costco, while Walmart Supercenters are the preferred grocery store for middle- to low-income households.
A similar shift toward increased spending at warehouses and discount stores is already showing up in Navy Federal internal spending data, which covers about 15 million members, Long said.
“People who used to shop at Whole Foods are now costcoAldi, and we see that people are still trying to get the most out of every dollar,” Long said, adding that the behavior is showing up “almost across all income ranges.”
“Frustration about inflation and affordability is real,” she said.
