Wage Increases Outpacing Inflation
For the 20-month period ending in December 2024 (the latest available data), average real wages adjusted for inflation have risen. This marks a shift in the economic landscape as inflation decelerates faster than nominal wage growth (not adjusted for inflation).
According to the U.S. Bureau of Labor Statistics, this trend signals a welcome reprieve for workers who endured prolonged periods of wages failing to keep pace with inflation.
The interplay between nominal wage growth, inflation, and real wage growth offers a telling narrative of the labor market. From 2021 to mid-2022, real wages were consistently negative, as inflation soared past wage increases. At its peak in June 2022, inflation reached 9.1% year-over-year, outpacing nominal wage growth of 5.4% and driving real wages down by 3.3%.
However, since mid-2023, the dynamics have shifted. Inflation has steadily declined, falling to 3.1% by November 2023, while nominal wages maintained steady growth around 4.3% to 4.7%. This deceleration in inflation, combined with stable nominal wage increases, has allowed real wages to turn positive. For instance, in November 2023, nominal wages grew by 4.3%, while inflation was only 3.1%, resulting in a real wage growth of 1.1%.
This sustained improvement reflects broader economic adjustments. Employers are offering higher wages to attract talent amid ongoing labor shortages, while the Federal Reserve’s monetary policy has successfully tempered inflation without severely disrupting wage growth. Additionally, industries with tight labor supply are driving nominal wage increases, further contributing to this positive trend.
The significance of this shift cannot be overstated. For workers, rising real wages translate to greater purchasing power. For policymakers, the data underscores a balanced economic environment where inflation is under control without stifling wage growth.
Looking ahead, sustaining this momentum will require continued vigilance. Policymakers must ensure that inflation remains subdued while supporting wage growth through investments in productivity and workforce development. With these strategies, the economy can build on its current trajectory, fostering broad-based prosperity for workers and businesses alike.