In the wake of soaring inflation since spring 2021, David Hewitt, a university professor, has been struggling to keep up as his paycheck remains stagnant. The disparity between his income and the cost of living became glaringly evident in June last year when his wage rose merely 1.5%, in stark contrast to consumer prices that surged to a 40-year high of 9.1% year over year. This financial strain is palpable in the Hewitt household where the family had to cut their twice-weekly meal deliveries in half as their restaurant takeout bill inflated from roughly $70 to $100.

However, the pendulum seemed to swing slightly in Hewitt’s favor in August when inflation slowed to 3.7% and he bagged a 3.5% pay raise. With another potential wage increase on the horizon and an additional teaching assignment to earn extra cash, the Hewitt family has started to order in more. But the inflation scare has left its mark; they are yet to return to their previous ordering frequency. Despite these minor improvements, Hewitt, like many American workers, still grapples with high interest rates, the ceasing of COVID-related federal aid, and return-to-office mandates that are ramping up daily expenses such as commuting and lunches out.

US Wage Growth vs Inflation: A Closer Look

The Struggle of Keeping Pace with Inflation

David Hewitt, a university professor, has witnessed the impact of inflation on his daily life. His paycheck, despite a typical increase of 1.5% from the prior year, has struggled to keep up with the surge in consumer prices, which reached a 40-year high of 9.1% year over year in June 2021. As a result, Hewitt and his family were forced to cut their restaurant takeout order frequency in half.

Signs of Improvement

However, as of August 2021, inflation was recorded at 3.7%, while Hewitt had benefited from a 3.5% pay raise, with prospects of a more significant increase in the coming months. He was also teaching an additional class for extra income. This has allowed the family to order in more often, although not at their previous frequency. Yet, as Hewitt points out, prices are not going down.

Wages Overtake Inflation, But Gap Remains

Since May 2021, average U.S. wage growth has started to outpace price increases, providing consumers with more purchasing power and bolstering the economy. However, despite this development, most Americans feel they have not caught up with the steep rise in prices and are spending cautiously, according to a Harris Poll survey for USA TODAY.

The Impact of Wages and Inflation on Consumer Spending

The same survey revealed that of the 52% of employees who received a raise in the past year, 70% said it has reduced their financial stress from inflation and enabled them to make additional purchases. Yet, approximately one-fifth of those who received an increase stated it wasn’t sufficient to comfortably afford specific goods and services. Majority (78%) said they would need another raise to feel fully confident about their financial health.

The Road to Recovery

While average wages rose by 4.3% annually in August, outpacing inflation’s 3.7% increase, most consumers still feel incomplete. This is because they’ve only partially bridged the gap between prices and wages that began forming in early 2021, according to a Bankrate analysis. The study predicts that, at the current pace, workers won’t recover their lost purchasing power until the end of 2024.

Takeaways

The battle between wages and inflation is a critical aspect of the economic landscape. While wage growth has started to outpace inflation, the gap that formed in early 2021 is still present, leaving many consumers feeling the pinch. The situation underscores the importance of robust wage growth in ensuring financial stability for workers in the face of rising costs. Policymakers and employers alike need to take this into account as they navigate the current economic challenges.