Key Takeaways:
- The cost-of-living problem in America is due to inflation outpacing paycheck growth, with average hourly wages increasing by 3.5% over the past year, barely keeping pace with the 3% annual gain in consumer prices.
- The wage growth is uneven, with top earners experiencing a 4% gain, while middle-income households saw a 2.3% increase, and low-income households only gained 1.4% in pay over the past year.
- The annual growth in American workers’ hourly pay has been steadily falling since March 2022, and the job market is worsening, with the US economy losing jobs in three of the past six months.
- The Federal Reserve is trying to boost the job market by cutting interest rates, aiming to lower the cost for businesses to borrow money and increase hiring.
- The Consumer Price Index report is expected to show that annual inflation rose to 3.1%, further narrowing the gap between paycheck growth and price increases.
Introduction to the Cost-of-Living Problem
The cost-of-living problem in America is a simple yet pressing issue: inflation has outpaced paycheck growth, leaving many individuals struggling to make ends meet. The latest jobs report revealed that the problem has worsened, with American workers making an average of $36.86 an hour in November, up 3.5% over the past year. However, this increase is barely enough to keep pace with the 3% annual gain in consumer prices, and it is the lowest annual paycheck growth since May 2021.
Uneven Wage Growth
The wage growth is uneven, with top earners experiencing a 4% gain, while middle-income households saw a 2.3% increase, and low-income households only gained 1.4% in pay over the past year. This disparity is a significant concern, as it exacerbates the cost-of-living problem for those who need it most. The data from Bank of America’s deposit data shows that the wage gains are not evenly distributed, and this trend is likely to continue unless there is a significant change in the job market.
Declining Wage Growth and Job Market
The annual growth in American workers’ hourly pay has been steadily falling since March 2022, when it topped out at 5.9%. This decline is partly due to smaller cost-of-living adjustments as inflation has returned to near-normal levels. However, the worsening job market is also a significant factor, with the US economy losing jobs in three of the past six months. The rate of workers who voluntarily quit their jobs has also fallen to a five-year low, indicating that people are staying in their jobs for longer, which reduces the incentive for employers to give them big raises.
Federal Reserve’s Response
The Federal Reserve is trying to address the cost-of-living problem by boosting the job market. The Fed has cut interest rates in three straight meetings, aiming to lower the cost for businesses to borrow money and increase hiring. The theory is that a better labor market will give Americans more choices in jobs, increasing the amount of pay companies would need to shell out to keep and attract workers. Federal Reserve Chair Jerome Powell argued that the best way to fix Americans’ cost-of-living concerns is to boost the job market, and that over time, people will adjust to costs that have stayed elevated after the price shock from a few years ago.
Inflation and Price Increases
However, there is another side of the equation: prices, which have been creeping higher in recent months. After falling to a four-year low of 2.3% in April, annual inflation is back to the 3% level where it started when President Donald Trump took office. The increase in prices is partly due to Trump’s tariffs, which, in theory, will not add to long-term inflation problems. However, companies have eaten roughly 80% of Trump’s new tariffs thus far, and their profit margins are shrinking, which means they will begin passing much of those costs on to consumers in the form of higher prices next year.
Conclusion and Future Outlook
The Consumer Price Index report is expected to show that annual inflation rose to 3.1%, further narrowing the gap between paycheck growth and price increases. Both trends are pointing in the wrong direction, exacerbating perceptions that America’s cost of living is no longer affordable. The Federal Reserve’s efforts to boost the job market are crucial in addressing the cost-of-living problem, but it will take time to see the effects. In the meantime, individuals will have to continue to navigate the challenges of rising prices and stagnant wage growth. As Powell said, "We are going to need to have some years where real compensation is higher … for people to start feeling good about the affordability issue."
