Inflation and Lagging Incomes: A Struggle for American Households

While inflation may be cooling, not all households are breathing a sigh of relief. The soaring inflation that has crippled household budgets over the past few years may technically be receding, but working Americans say they are not feeling any financial relief because their paychecks haven't kept pace.

A recent survey conducted by Bankrate revealed that about 60% of working Americans believe their income has lagged behind inflation over the past 12 months. "A gap exists and that's what I think workers are telling us," said Bankrate Analyst Sarah Foster. "Their incomes have come up and they are reaping the benefits of the job market, but prices have gone up even more so they're still playing this game of catch up," she added.

U.S. consumers continue to spend

Despite paychecks not keeping pace, Americans have managed to keep the economy humming by spending what dollars they do have.

"Consumers are not letting inflation deter their spending," stated Foster. Despite not being happy with rising prices, they are still willing to spend their money.

One of the reasons Americans are able to maintain their spending habits is due to a strong job market and higher wages. Recent data shows that wage increases are at their highest levels in years.

However, a survey conducted by Bankrate suggests that these wage increases are not having the desired impact, especially for low-income earners who make less than $50,000 a year.

Inflation started affecting Americans in the first quarter of 2021 when the Federal Reserve implemented measures to cool down the economy after the pandemic-induced lockdown. Since then, the prices of everyday consumer items have risen by 16.7%, while wage growth has only been around 12.8%, according to Foster.

This breakdown aligns with the latest government data, which shows that worker wages have not grown significantly when accounting for inflation.

According to the Bureau of Labor Statistics, the average hourly worker's real earnings were $10.96 in October 2022. A year later, in October 2023, that wage only increased by 0.8% to $11.05. Meanwhile, inflation rose by 3.2% during the same period.

Compared to a year ago, today's inflation is relatively mild. In June 2022, the inflation rate reached its highest point in 40 years at 9.1%. However, some economists predict that inflation will continue to decrease next year, potentially reaching as low as 2.4%.

"The inflation fever that has been affecting the US economy since early 2021 seems to be subsiding," stated Kevin Kliesen, a business economist at the Federal Reserve Bank of St. Louis. He further added, "The US economy is entering the fourth quarter of 2023 with strong momentum and a healthy labor market."