Wages Are Finally Beating Inflation - Here’s What That Means for You

After a tumultuous couple of years for workers and the overall cost of living, the latest employment report unveils a promising trend — wages are finally outpacing inflation. As the U.S. grapples with a 3.1% inflation rate for the 12 months ending November 2023, wage growth has become the light at the end of the tunnel, rising steadily in comparison.

The significance of wage growth beating out inflation

Wage growth surpassing inflation carries profound implications for individuals and the broader economy. It means increased purchasing power for workers, potentially mitigating the impact of rising prices on their daily lives.

Understanding the dynamics of this shift is crucial for businesses, policymakers, and individuals navigating the complex terrain of economic stability.

According to the Center for American Progress, 57% of workers are making more money after adjusting for inflation than they were just a year ago. Additionally, 41% have seen a real wage increase of more than 5%. This is good news overall, but prices are usually a one-way ticket up.

Prices are usually sticky, meaning if a pizza pie costs $22 now, it probably won’t go down to $18 in a couple of months just because it should. Economic shocks like a recession or crash typically cause prices to go down. So, if you received a 5% real-wage increase but your pizza still costs $22, it’s still expensive.

How wage growth has compared to inflation growth over the past few years

In November 2023, while inflation stood at 3.1%, wages surged to an impressive 5.2%. This reversal of the traditional narrative, where inflation is often higher than wages, is a step in the right direction but does not tell the whole story.

Wage growth is usually an indicator of good economic health, and the American economy is currently doing fairly well. It sustains a resilient labor market with low unemployment and growing salaries, so all is well ... right? Not exactly.

Wages are growing, but not at the same rate for everyone. The most recent labor report shows that wages grew for all workers, but not every worker shared the same experience over the past three years.

The majority of those who lost their jobs in 2020 were low-wage workers who worked in industries like hospitality and leisure. Think waiters, bartenders, tourism workers, etc. Those who decided to stay were able to demand and receive larger pay. Remember when McDonald’s was offering free iPhones, sign-on bonuses, and higher salaries to account for the worker shortage? 

Eventually, this worker shortage reversed, people returned to work, and those inflated wages in lower-income positions corrected. Those increases, though, still got captured in the data - but it did not mean there was a meaningful impact on living standards for lower-wage workers.

What’s worse, prices have increased and remained high since the onslaught of the pandemic. While all wages have been trending up, lower-income workers are still struggling with the high cost of living. In fact, 4 in 10 Americans told the U.S. Census Bureau that they were having difficulties meeting their household expenses this year and needed their paycheck to stretch further.

What 2024 could bring

As we stand on the cusp of a new year, speculation arises about what 2024 might hold for the delicate balance between wages and inflation. Will this trend of robust wage growth continue, or are there underlying challenges that could alter the trajectory?

Markets have generally predicted a decrease in interest rates moving into 2024, hopefully putting an ease on the cost of borrowing and maybe pushing prices a bit down so people can save more on everyday essentials.

The American economy has remained resilient, with low unemployment and promising wage figures, and barring any out-of-the-ordinary event, will hopefully remain on a steady path moving into the new year.

Bottom line

While many Americans still struggle to make ends meet, the latest reports of increased wages are promising. Should the trend continue, and interest rates decrease this year like many experts expect, it could bring some much-needed relief to the millions of Americans who were disproportionately affected by last year’s market volatility and continued pandemic after-effects.

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