When are wages likely to increase to match the easing of prices?

Although the worst of rising prices appears to have passed, many Americans are still experiencing financial strain while shopping.

Since inflation began to rise rapidly in 2021, most people's wages have not kept pace with the cumulative effects of inflation.

According to Bankrate's Wage To Inflation Index, which uses the U.S. Department of Labor's headline consumer price index for inflation and the employment cost index for wages, prices have risen 20% from January 2021 to June 2024, while wages increased by 17.4%.

While inflation has decreased somewhat in the past year, wages are gradually increasing, helping to mitigate some of the inflation that reached its peak in mid-2022. However, there is still a considerable distance to be covered.

Median real wages, adjusted for inflation, have only increased by 0.8% in the past year, as of August 2024.

According to Bankrate's data, wage growth has slowed down from 1% per quarter to 0.84% in the last three months ending June 2024.

According to Bankrate's projections, the wage growth rate is expected to decrease, and the gap between wages and inflation is predicted to remain unclosed until the second quarter of 2025.

High interest rates are reducing both inflation and wage growth

In March 2022, the Federal Reserve raised its benchmark interest rate for the first time in a series of 11 hikes, increasing the current effective rate to 5.33% in an effort to combat inflation.

The benchmark rate affects borrowing costs for various products, including credit cards, loans, and auto financing. Increasing the rate discourages borrowing and investments, which can decrease inflation.

According to Bankrate, it appears that business investment has been slowing down, which may be hindering wage growth.

According to Bankrate analyst Sarah Foster, a slowdown in the job market is a consequence of higher interest rates, which were intended to curb inflation.

Since January 2021, wage gains have varied greatly across industries. While leisure and hospitality workers experienced a 23.7% increase in wages, which is higher than the overall average of 17.4%, education workers only gained 13.6% over the past three years.

This week, it is predicted that the Fed will declare its first interest rate reduction in over three years.

According to Foster, this will prevent the economy and job market from being negatively impacted by sudden braking.

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