U.S. Wage Growth Fails To Keep Up With Rising Prices For 17 Consecutive Months

Key Takeaways

• While American workers are making more dollars per hour than they were prior to the pandemic, those dollars aren’t stretching as far thanks to inflation. Accounting for inflation, wages have actually fallen over the past 17 months.
• The Fed is actively raising rates in an attempt to combat inflation, but those same policies could further damage the already financially tenuous situation of the average American worker.
• As a result of federal rate hikes, we have seen borrowing rates go up, making it more expensive to finance a home or vehicle.

For the 17th consecutive month, real average hourly wages fell in the U.S. in August 2022. That means workers are effectively being paid less when you account for the rising cost of everything, from luxury items to everyday staples.

Inflation needs to de-escalate more than it has in recent months, but the same policies the Fed is using to fight inflation could end up hurting American workers who are struggling to keep up on the bills.

Wage growth in the U.S. vs. Inflation

Wages – for the most part – have technically been moving upwards during this time period when we look at dollar amounts. In March of 2021, the average hourly wage in the U.S. was $30.06. In August of 2022, the average was $32.36.

The problem is that these increases are happening against the backdrop of generational levels of inflation. From March 2021 to August 2022, inflation has risen 11.81%. That means if it cost you $5,000 per month to run your household in March of last year, it would currently cost you about $5,591 to cover the exact same expenses – nearly $600 more.

Meanwhile, if you’ve been lucky enough to maintain a 40-hour work week over that entire period and capitalize on the average wage growth, your income only went up $368 per month, leaving you with a deficit of about $223 per month.

If you were one of the many Americans that lost hours over this time period, the deficit is even worse.

Impact of less discretionary income

In theory, less discretionary income is supposed to help lower inflation, which is caused by too much money in the market chasing after too few goods. If you can lower people’s discretionary income, they’re less likely to make unnecessary purchases, lowering demand. Ideally, that would bring prices down – or at least prevent them from rising further.

But most Americans already lack that extra discretionary income. In a recent Bankrate survey, 39% of American workers who received a pay raise in the past year said they were struggling to afford basics like groceries and other household goods because their pay hadn’t kept up with the pace of inflation.

In 2021, the average worker received a pay increase of 4.7%. Inflation for the calendar year was 7.1%, giving them an effective pay decrease.

On the other hand, people with meaningful discretionary income have actually seen pay raises that outpace inflation. CEOs received pay increases of 18.2% from 2020 to 2021 – leagues ahead of inflation.

Regardless of who has access to the discretionary income, the Federal Reserve’s attempts to combat inflation could cause serious damage to the average American worker who already can’t access enough capital to keep up.

Contractions in the job market can reduce worker’s bargaining power when it comes to pay negotiations, and the ensuing economic consequences can cause corporations to cut back on labor investments further.

The Fed is attempting to lower inflation by raising interest rates and plans to continue doing so well into 2023. Raising interest rates is supposed to reduce discretionary income and therefore decrease inflation.

Savings rates

When the Fed raises interest rates, we tend to see the APY on savings products go up. While banks almost always raise savings rates at a slower clip than they raise borrowing rates, in 2022 there has been a particularly pronounced lag.

In fact, as of September 2022, APYs offered on savings accounts still haven’t caught up with the Fed interest rate hikes that started in March. This month they did see their largest climb, though, with the highest offer on the market jumping to 3.00% APY.

The federal funds rate – the rate at which banks borrow money against their own reserves held with the Fed – is currently 3.00%-3.25%. Ideally, banks would be paying out more than that in APY. They’re certainly charging more than the Fed rate on debts.

But for now, they’re not paying out on savings accounts in proportion with the rate hikes. APYs have risen, but remain below the federal funds rate, reducing any advantages consumers could reap on the rate increase.

Borrowing Rates

While saving hasn’t gotten dramatically more lucrative since the Fed started raising rates, borrowing has certainly gotten more expensive.

In February 2022, you could routinely find rates on conventional, 30-year mortgages for under 4%. As the Fed began raising its own rates, mortgage interest rates followed suit. In September, rates have consistently been well above 6.3% on conventional 30-year mortgages.

After the Fed announced another rate hike on Sept. 21, 2022, rates jumped up 0.29% within 24 hours to 6.53%. The climb is expected to continue.

These rate hikes are meaningful. Even in a fantasy world where housing prices have remained stable over the past six months, the difference between a 4% interest rate and a 6.53% interest rate on the same $400,000 home with a 30-year mortgage (assuming a 20% down payment) is $178,377 over the course of the loan.

This makes buying a home prohibitively expensive for many Americans, putting more demand strain on the rental market. Rent hikes are a likely result, especially because the U.S. is in the middle of a prolonged housing shortage with no end in sight.

Bottom line

Using monetary policy like rate hikes is a delicate game. The Fed is trying to lower inflation without encouraging another recession where people lose their livelihoods en masse.

But because the vast majority of people’s livelihoods already aren’t covering the cost of living, it’s unclear if their efforts will be successful. The Fed is walking a tightrope. All the while in the background, there are still pandemic-related supply chain issues and global conflicts compounding inflation across the world.

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