Pay raises just caught up with inflation for the first time in 2 years


For the first time in two years, Americans are getting raises at work that might actually mean something.

That's because they're finally seeing an increase in average hourly pay that's bigger than the overall bump in prices. It's known as real wage growth and is a welcome marker of what could be the start of some economic momentum after years of many workers struggling to simply stay afloat. 

In the month of May, prices overall rose a less-than-expected 4% from May 2022. In comparison, average hourly wages were up 4.3% over the same time period. After some rounding and the Bureau of Labor Statistics seasonal adjustments to compensate for changing employment and wage patterns from month to month, that's a 0.2% increase in real wages.

In the graph below, you'll see wages are seeing real growth when the yellow and blue lines intersect with blue coming out on top. May was the first time that's happened since March 2021. That's despite the strongest wage growth in decades — inflation was simply stronger. Now, however, while wage growth has been slowing over the last several months, inflation has been coming down even faster.


Of course, this is just one month of real wage growth after two years of average pay lagging behind rising prices. There's still a long way to go for many Americans to feel economically stable, especially after recent cuts to food stamp benefits, which could face even more slashes. In addition, student loan payments are set to resume in September, and credit card balances just keep climbing even as that debt gets more and more expensive due to rising interest rates. 

Looking closer at what's draining Americans' wallets the most could give an indication of who will benefit more from real wage growth. Energy prices dropped and food prices pretty much held steady in May, while the biggest increases were still in vehicles and housing-related costs. So if you're renting or looking to buy a home, or if you're in the market for a car, that blue line above might mean a lot less.

The slowdown in inflation comes as the Fed weighs its next move in its fight against rising prices. After raising interest rates a total of 10 times over the last two years, markets widely expect the Fed to take a breather and keep rates steady at the central bank's Wednesday meeting amid slowing inflation and worries about tighter lending after the recent bank failures. If inflation keeps sliding while the broader economy stays strong, the US could hit the "soft landing" that the Fed has been aiming for.

The good news is that the job market seems to remain strong in the US, so as long as inflation keeps slowing and consumers are able to pay down some of that expensive debt, this could be the start of a leveling out. 

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