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As Rising Prices Continue to be a Concern, Here's how Wage Growth is Faring Against Inflation

For two years, soaring inflation eroded most workers' wage gains but recent data from the Bureau of Labor Statistics suggests that the tide is turning.
Image Source: Getty Images | Photo by Justin Sullivan
Image Source: Getty Images | Photo by Justin Sullivan

Although Americans have been under pressure due to rising prices, a surge in wages that finally outpaces inflation has come across as a ray of hope for several workers. For two years, soaring inflation eroded most workers' wage gains but recent data from the Bureau of Labor Statistics suggests that the tide is turning. A recent fall in inflation driven by factors like falling used car prices and stabilizing rents provides further optimism for consumers, per CBS MoneyWatch.

Image Source: Getty Images | Photo by Oli Scarff
Image Source: Oli Scarff/Getty Images

After a challenging period of stagnant wages and surging prices, American workers are finally witnessing a positive shift in their earnings. The growth in average hourly pay at an annual rate of 4.4% over the last three months has outpaced the Consumer Price Index, which is a crucial metric for gauging inflation. In June 2023, the Consumer Price Index grew at a rate of 3% and in May, it was 4%. This trend is reassuring for economists, who are now more optimistic about the U.S. economy's prospects of avoiding a recession, largely due to the strong wage growth that allows consumers to continue spending.

John Anderson, a construction worker from New York shared his relief at the recent increase in his paycheck. "For a while, I was struggling to keep up with the rising prices of essentials like groceries and fuel. It felt like my paycheck was never enough. But now, with wages rising faster than inflation, I finally see a glimmer of hope."

Economists surveyed by the Wall Street Journal have downgraded their expectations of a recession in the coming financial year from 61% to 54%. Additionally, Goldman Sachs has lowered the probability of an economic downturn to 20%. The fall in unemployment, a resilient housing market and the growth of factories all contribute to economists' belief in continued economic growth, albeit, at a more moderate pace.

In a recent interview with CNBC, Dr. Sarah Reynolds, a leading financial analyst, commented on the positive economic outlook, "The recent data on wage growth is a significant factor in driving down recession concerns. The rise in wages, along with other favorable economic indicators, suggests that consumer spending will remain robust, providing a cushion against potential downturns."

One of the most encouraging aspects of the current economic landscape is the sustained decline in inflation. Many goods and services that drove up prices in 2021 and 2022 are now becoming more affordable. Used car prices, which were a significant driver of inflation, are falling as automakers ramp up production and address supply-chain challenges. CBS MoneyWatch also reports that companies like Ford and Tesla have recently reduced prices on their vehicles, providing relief to consumers.

Notably, the cost of gas has dropped from its peak of over $5 per gallon to around $3.50 per gallon. Grocery costs are also growing at a slower rate, with certain items, such as eggs, seeing a significant 40% price reduction since the beginning of the year. In several cities, rent prices have plateaued and some areas, like California and Florida, are experiencing rent decreases, according to ApartmentList.

While core inflation (excluding food and energy prices) remains at a relatively high annual rate of 4.8%, the robust job market gives hope that the Federal Reserve can manage inflation without severely impacting consumers. Experts believe that the sustained decline in inflation is positive for the U.S. labor market outlook, providing the Federal Reserve the opportunity to gradually lower interest rates through 2024. This, in turn, encourages private sector investment and allows workers to receive real wage increases, leading to an expansion of their purchasing power.