December 11, 2023

Image by Tang Mingdong | Digital Vision | Getty Images

The purchasing power of workers rose for the first time in two years in May as inflation continued to retreat from its pandemic-era peak.

Economists say that if the trend continues, it will be good news for households, who can rely more on wages rather than savings or credit cards to support day-to-day expenses.

According to the agency, “real” hourly earnings rose an average of 0.2% this May compared to May 2022 Bureau of Labor Statistics.

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Real earnings represent the average worker’s annual wage increase (as measured by the Consumer Price Index (CPI)) after accounting for increases in the cost of household goods and services.

A positive number means that the standard of living of the average worker has improved. A negative number means the opposite: wages can’t buy as much as they did a year ago.

May’s data was the first positive annual reading since March 2021, BLS data showed data. Aaron Terrazas, chief economist at job site Glassdoor, said that before the latest data, workers had endured a decline in purchasing power for 25 straight months, the longest stretch on record.

“It’s clearly a result of inflation starting to come down,” Terrazas said.

“It’s good that real wages are going positive,” he added. “But a lot of people are just catching up to what happened in the last two years.”

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For ordinary people, however, inflation swamps wage growth. Food, rent and gas costs for these households are rising faster than wages.

The consumer price index (CPI), a barometer of inflation, peaked at 9.1% in June 2022, the highest level in four decades, but has since fallen to 4% every year.

Wage growth, meanwhile, also fell, but at a slower pace, meaning Americans got a net boost in financial well-being in May compared with last year.

“The reversal in trend is good news for consumers, who weathered the recession well and will now come out stronger,” Pollack said.

Positive Trajectories for Household Purchasing Power

Other economic indicators further point to improvements in household well-being.

For example, Americans’ “real” disposable personal income—whether in Total and per capita — According to the latest data from the U.S. Bureau of Economic Analysis, it has risen for 10 consecutive months since June 2022.

These datasets are more inclusive than wage growth data. That includes things like interest income, rental income and dividends, which are all strong, said Mark Zandi, chief economist at Moody’s Analytics.

This is clearly a result of inflation starting to come down.

Aaron Terrazas

Chief Economist, Glassdoor

Zandi said the trend is a “very encouraging” sign for consumers, who are less likely to need to supplement their income with excess savings or additional debt.

According to statistics, as of the end of March, Americans owed nearly $1 trillion in credit card debt, a record high. Federal Reserve Bank of New York. Credit card interest rates are also at historical levels, over 20%.

In addition, Moody’s estimates that excess savings accumulated during the Covid-19 pandemic peaked in September 2021 at nearly $2.5 trillion, roughly equivalent to 10% of U.S. economic output, Zandi said. Total savings had fallen to $1.4 trillion by April, a “massive drawdown,” he said.

While the contours of future inflation and wage growth are unclear, continued positive growth in real income and earnings would be good news for households and the economy, experts said.

“The key to avoiding a (recession) is that consumers continue to spend at a consistent rate, and that’s the rationale for what we’re going to see here,” Zandi said of the real income data. The firewall between economic growth.

“The firewall remains strong,” he added.