Still, many consumers appear to be taking little consolation in those strides.
While price growth for some common purchases is slowing or even reversing, there are few parts of the economy where prices are outright lower today than pre-pandemic. And while average pay gains have narrowly outpaced inflation, that’s not the case for every household.
Inflation remains high — but is slowing
Inflation has slipped lately in Americans’ rankings of the most important problems facing the country today, according to Gallup. But given the persistence of higher prices, feelings about the economy overall continue to suffer. Gallup’s economic confidence index remains in negative territory, despite signs that price growth is slowing.
In May, the 12-month change in the Consumer Price Index hit 3.25%. That is down from 3.36% in April and far lower than the 9.1% peak in June 2022.
Grocery price growth has dropped to a crawl, climbing just 1% in May since the year before. Gas, too, is now roughly 11 cents cheaper than a year ago. Even excluding volatile food and gas prices, 12-month inflation has slowed every month since October 2022.
Wages are growing sustainably
Meanwhile, annual wage growth has slowed to 4.1% after hitting a post-pandemic high of 5.9% in March 2022. Still, the latest pace is faster than the roughly 3% seen before the pandemic, reflecting ongoing shortages of workers — particularly those in service roles.
In a recent speech, Federal Reserve Governor Adriana Kugler voiced optimism that Americans’ pay gains would continue to rise faster than inflation, but not so much that businesses would hike prices up even more to capture more of their spending money.
“I want to see Americans experiencing strong wage growth, but for that wage growth to be sustainable, it must be consistent with our inflation target,” she said. “Notably, as inflation has come down, real wages have been rising and now exceed pre-pandemic levels, which means that the purchasing power of workers has also been increasing.”
Causes versus effects
But even though pay has broadly outrun inflation, many Americans still don’t feel better off than they were a few years ago.
One reason is that the tight labor market early in the recovery from the pandemic — where demand for workers exceeded their supply — has pushed wages higher in parts of the economy that quickly feed back to customers. In other words, Americans are encountering the places where price growth has been fastest more frequently.
Notably, wages for front-line, in-person sectors — including those hit hardest in the pandemic — like restaurant and retail positions continue to soar.
Average pay at “food services and drinking places” has climbed from about $14 an hour to $18 since the start of the pandemic — an increase of nearly 30%, BLS data shows.
“There were increased commodity costs. We’ve seen those start to normalize,” Jim Salera, an analyst at the financial firm Stephens, told CNBC in May. “But what continues to be ahead of historical averages is the increase in labor costs that restaurants are seeing.”
Last month, McDonald’s USA President Joe Erlanger cited higher pay as a factor in the chain’s menu price hikes.
“The average price of a Big Mac in the U.S. was $4.39 in 2019,” he said. “Despite a global pandemic and historic rises in supply chain costs, wages and other inflationary pressures in the years that followed, the average cost is now $5.29. That’s an increase of 21% (not 100%).”
Unemployment is rising but still historically low
Economists say the labor market will determine the fate of wage growth.
At 4%, the unemployment rate as measured in May was at its highest level since January 2022. But that was after 28 straight months of sub-4% unemployment — the longest-such stretch since the late 1960s.
Today, the supply and demand for workers is coming back into balance; employers aren’t quite as hungry for them, and there are now fewer competing for the available roles.
Low-wage workers have been an exception. For months, those earning less than $55,000 have been getting hired at a faster rate than before the pandemic, the financial services firm Vanguard found this spring.
As a result, many of the most cost-sensitive consumers have been able to stay afloat, even as budget pressures remain.
“Cumulative wage growth since the start of the pandemic has outpaced price growth across the wage distribution, but the most wage growth has been among lower-wage workers,” Bank of America economists wrote in a note to clients Tuesday. “This is likely because labor shortages have been the most acute in blue-collar sectors. While recent wage growth has been distributed more evenly across the distribution, the large cumulative wage gains for lower-income consumers since 4Q 2019 have buffered them against the inflation shock.”