Wages are finally rising faster than inflation. Will Americans ever feel like it?

Glenn Stellwag is making more money than ever between his two jobs and side hustles. Even then, he feels like he’s barely scraping by most months thanks to inflation.

After a back injury cost him his job at a sawmill six years ago, Stellwag, 41, has worked at a local hardware store near his Michigan home, where he stocks shelves, rings up merchandise and assists customers four days a week from 9 a.m. to about 6 p.m.

But last October, Stellwag found a second job with a tow truck company, work he picked up when he felt he “couldn’t afford to live anymore.”

He’s on call six days a week from 7 p.m. to 7 a.m. The way his schedules line up, he doesn’t have a single night off from work.

He’s since added other gigs repairing lawn mowers and small engines. His total monthly income rounds out to anywhere between $2,500 and $3,000 a month, all of which goes toward his groceries, mortgage, truck payment, car payment, insurance and utilities.

Even his hobby – mud bogging – has grown too expensive.

Untouched and spotless, his truck sits in his backyard, waiting for the economy to turn around.

Workers all across America are feeling the same double-edged sword as Stellwag.

After cratering during the pandemic, the job market roared back, becoming the hottest in a lifetime and bestowing workers with even better bargaining power, job opportunities and raises than before.

But it failed to be fully felt.

Parallel with supply shocks and pandemic-related disruptions, inflation also burst as the economy fired off on all cylinders, eating away at many workers’ gains. When the gap between wage growth and inflation was at its widest in the third quarter of 2022, prices had jumped 12.8% since the start of 2021, while wages had climbed a smaller 9.1%, a 3.7-point gap, a Bankrate analysis of inflation and wage growth data shows.

Pay is beginning to catch up in the race, and since May, has been rising faster than inflation after losing ground for more than two years.

As of the second quarter of 2023, prices are up 15.8% since the beginning of 2021, while wages have climbed 12.8%, based on the latest Bureau of Labor Statistics data.

The trend is a win for workers – a feature of a job market that’s been surprisingly resilient as inflation slows and interest rates rise.

Nonetheless, a gap between household buying power and inflation remains.

At its current pace, workers’ wages aren’t set to recover their loss of total purchasing power until at some point in the fourth quarter of 2024, according to Bankrate’s new Inflation To Wage Index.

The continued recovery has major implications for Americans’ personal finances, with many saving less for emergencies or retirement and taking on more credit card debt to handle inflation.

Can wage growth catch up?

Whether these projections come to fruition depends on the U.S. economy continuing to hold up – a possibility that economists are growing more optimistic about, even if it remains less than probable.

If a recession begins, inflation and wage growth could take a much sharper nosedive, putting Americans’ wallets at risk of catching up much more slowly, if at all.

Making or breaking that possibility are the Fed’s interest rate decisions.

Officials say they can be more patient about lifting rates, and they may even keep rates steady when they meet later this month. Yet, their projections from June show at least one more increase is currently on the table. Higher interest rates slow economic growth, and a major risk is the Fed doing too much.

Even if officials don’t lift borrowing costs anymore, they’re also nowhere near ready to declare victory and start cutting rates.

A separate gauge of inflation excluding food and energy is up 4.7%, more than two times higher than the Fed’s official 2% goal. The longer the Fed keeps rates high, the more it slows the economy.

Cooling wage growth may also be necessary to get inflation in check – a process that often requires a slowing job market, affording workers fewer new opportunities and less bargaining power.

Fed Chair Jerome Powell has said higher pay wasn’t the primary cause of inflation, but he’s also reiterated that pay is running hotter than a level that’s consistent with the Fed’s objective.

“Wages are the bridge between the labor market and inflation,” says Nela Richardson, chief economist at ADP, a payroll data company. “Wages never drove up inflation, but it might keep inflation higher for longer.”

For many Americans, a stronger job market may not be worth the trade off of hotter inflation, especially if their skills, lives and careers don’t grant them as much advancement.

“For those who are able to obtain employment with higher or rising wages, they should fare well, at least in the near-term,” Hamrick says. But “while the economy and job market are quite dynamic, not everyone possesses the skills or opportunities to enjoy upward mobility.”

‘It does me no good’

It’s Americans like Stellwag who Powell says officials are keeping in mind as they squeeze the U.S. economy with the hardest force in four decades, even if it risks a recession.

Not all households experience inflation the same, and those living paycheck to paycheck have less wherewithal to absorb higher prices in their budgets.

“We understand that our actions affect communities, families and businesses across the country,” Powell has said at every press conference since January 2022. “Everything we do at the Fed is in service to our public mission.”

Stellwag has yet to notice falling inflation.

Even his job at the hardware store gives him a front-row seat.

Before the pandemic, he used to update prices on inventory “once or a twice a year,” he estimates.

Even today, he’s still updating some prices every week. He’s noticed that PVC pipes are beginning to come down – but in “cents when they went up dollars,” he says.

About a year ago, a business next door started advertising a $15 starting wage. Two days later, his boss bumped his pay to the same hourly rate.

“Every time my wage goes up, the price of everything else goes up, and it does me no good,” Stellwag says. “With my physical condition, there’s not a whole lot more I can do to make more money. I’m stuck at a counter job or desk job. I’m just overwhelmed and optimistic, hoping things are going to level out and get better.”

Some sectors fare better

Wages and inflation depend on a person’s location and industry. Workers in some fields may find that their pay is holding up better than others – likely tied to labor demand coming out of the pandemic.

Bankrate’s analysis found that wages for workers in retail, leisure and hospitality, as well as food services and accommodation, never lost ground to inflation, with their wages up 16%, 18.9% and 19.6% since the beginning of 2021 compared to inflation’s 15.8% burst, respectively.

Of the industries that have fallen behind, health care and social assistance is keeping up better than any. Up 13.9% since the start of 2021, that sector’s pay may fully recover from the total loss of purchasing power quicker than the average worker, based on Bankrate’s Wage To Inflation Index.

Professional and business services pay is up 12.8% over the same period, matching wages overall.

Other industries have an even greater pay-to-inflation gap.

Manufacturing wages are up a smaller 11.7% since the beginning of 2021, while construction pay has risen 11% and financial activities pay is up a smaller 10.2%.

Wages for workers in public- and private-sector education have risen just 8.6% over the period, 7.2 percentage points below the overall rate of inflation.

Wages vs. inflation

Despite who’s missed or gained ground, the average worker may be worse off than they would’ve been had the post-pandemic inflation burst not occurred. Julia Pollak, chief economist at job posting site ZipRecruiter, says wages grew about 1.4-1.5% more than inflation each year between 2013 and 2019.

If that trajectory had continued, wages would have climbed 11.5% since February 2020, while prices would’ve increased exactly 7%, reflecting a 4.5% inflation-adjusted gain.

Meanwhile, Americans who have kept up with inflation may still feel like higher prices are more salient, she adds.

“It feels unfair; it feels like you lost control of your budget,” Pollak says. “A loss has a bigger effect on people than an equivalent gain.”

Even so, experts say Americans will likely feel better before their wages fully recover.

Americans’ confidence in the economy in July hit the highest since October 2021 and has been on the rise since pay first began eclipsing price pressures in May, according to the University of Michigan’s Survey of Consumers.

That bodes well for consumer spending, especially if Americans are employed and getting a consistent paycheck, according to Jordan Jackson, global market strategist and vice president of J.P. Morgan Asset Management.

Jackson expects that some labor shortages will still remain in a slowing economy, continuing to underpin wage growth.

Pay catching up to inflation is also a “real possibility,” even if a recession happens, he says. His peak unemployment estimate is between 4.5-5.5% – reflecting the lowest joblessness rate of any modern downturn.

“For the American consumer, a penny earned is a penny spent,” Jackson says. As long as Americans are “seeing prices still moving higher but moving higher to a lesser degree than the increase that they’re seeing in their wages, you keep the consumer afloat.”