Wages have started to outpace inflation. But let’s not get too excited.
Wages have started to outpace inflation. But let’s not get too excited.
With inflation down to 3%, wages are now growing faster than prices for the first time since March 2021.
Now, that’s only been true for the last two months. In May, wages just barely outpaced inflation by 0.2%. But in June, wages grew 1.2% faster. And while two months do not a trend make, this still feels significant.
It’s a sign of a healthy economy when wages grow faster than inflation.
In an ideal, theoretical world, “economists think that workers should get an increase each year in their pay of around 2% to keep pace with inflation, and an additional 1 to 1.5% to keep pace with productivity growth,” said Julia Pollak, chief economist at ZipRecruiter (a Marketplace underwriter).
For the last two years though we have not been living in that ideal, theoretical world. Inflation has been much higher than 2%, as we know all too well.
And wages?
“Real wages have been flat as a pancake,” Pollak said.
They haven’t even been keeping up with inflation, let alone outpacing it. Effectively, most workers have had a pay cut.
But now it seems like maybe, just maybe we’ve come through to the other side.
“People are bringing in more than they’re having to spend on goods in relative terms,” said Eric Winograd, chief U.S. economist at the asset management company AllianceBernstein. He said that is helpful all around.
“That’s good news from a household perspective, certainly, and good news from an economic growth perspective,” Winograd said.
But he said we should also be careful not to put too much stock in it just yet.
“Things tend to move slowly in the economy. And so extrapolating too far from one month of data is a dangerous game to play,” Winograd said.
It’ll be awhile longer, he said, before most economists will feel confident that wages are really outpacing inflation.
Chances are, it’ll also be a while before most people start to feel like their paycheck is going further again, said Layla O’Kane, a senior economist at the labor market analytics company Lightcast.
“It depends a little bit on what they’re consuming, and also what industry they’re in, because it’s not the case that everybody is experiencing wage inflation equally, right?” O’Kane said.
She said people who switch jobs and people who work in high-demand industries like food service and construction are most likely to feel this shift first.
Assuming, of course, that it continues.
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