A new study from the University of Chicago and ADP researchers indicates that American workers are experiencing a decline in real wages as inflation once again outpaces pay increases. According to the research, the Consumer Price Index reached an annual pace of 3.4% in July, while hourly wages rose by 3.2% during the same period. This trend follows a similar period from February 2021 to June 2022, when the purchasing power of the average paycheck fell by more than 4%.
The study attributed the recent rise in inflation to higher oil and gasoline prices resulting from the war in Iran. Researchers analyzed monthly payroll data from 16 million workers to understand how companies set wages. They found that most firms maintain standard annual raises of 2% to 4% even when inflation is high. This practice, described by labor economist Erik Hurst as a "wage growth norm," led to a lasting financial impact for 37% of workers, who earned less in inflation-adjusted terms in December 2024 than they had four years prior.
When wage increases fail to match inflation, the research describes the result as an "inflation transfer." This occurs when a company's productivity remains stable but real wages decline, effectively shifting the burden of higher prices from the employer to the employee. The study noted that while individuals who switch jobs are generally able to keep their pay in line with inflation, the process of finding new employment involves personal and financial costs.
The decline in real wages has contributed to a drop in consumer sentiment, which fell approximately 8% in August according to the University of Michigan. This suggests that even as unemployment remains low, workers may feel financial strain in their day-to-day lives, noticing that their paychecks do not go as far at the gas pump or grocery store. The study suggests that these losses from the 2021-2022 period were never fully recovered for many, leaving them more vulnerable to the current price spikes driven by global conflict.
The persistent nature of these "wage norms" means that unless companies deviate from 3% annual raises, workers will likely continue to see their purchasing power erode as long as inflation remains above that threshold. The researchers did not provide a specific date for when this trend might reverse, but they noted that the "long shadow" of previous inflation continues to impact affordability. Future updates on the Consumer Price Index and upcoming corporate budget cycles for 2027 will determine if wages eventually catch up to current price levels.