Since the start of the pandemic, PYMNTS Intelligence has tracked the real impact of inflation, as real wages, adjusted for price increases, have failed to keep pace with sticker shock.
Coming into 2024, PYMNTS found that 85% of consumers said increases in their paychecks had not matched the pace of higher pricing. Eighty-two percent of respondents said concerns about inflation topped their lists of economic woes, and only 17% held out any hope that inflation would subside anytime soon. About 4 in 10 consumers said they anticipated a wage increase this year, down from 43% who expected a raise in 2023.
In the meantime, inflation is cooling a bit, at least as measured in the latest reading for May, at 3.3% annualized.
Any relief in the paycheck-to-paycheck economy may prove short-lived, however.
The Federal Reserve Bank of Atlanta noted in a Thursday (June 27) blog post that we may be in for a long-term scenario where inflation overtakes any positive momentum in take-home pay.
The Fed noted that “real wage growth has turned slightly positive,” and calculated that through May, real wages were up 0.5% year on year.
But it’s not all good news.
“While real wage growth has turned slightly positive in recent months, the level of real wages is still below where they were at the onset of the inflation surge that we began to see in the first quarter of 2021,” said the Fed. “Simply put, real wages haven’t fully caught up to the sudden burst in inflation.”
In part, the shift to remote work (and the perks of flexibility) have proven to be at least somewhat of a headwind to wage growth, to the tune of two percentage points.
There may not be all that much relief in the cards. The Fed added that “firms’ wage growth expectations continued to suggest slowing wage growth over the year ahead,” at 3.6% through the next year from May onward, where that rate had been 4.3% measured into the first quarter of this year.
There’s not much wiggle room for spending, at least in terms of take-home pay, to match the upward march of prices. In the June survey of consumers announced by the University of Michigan, long-term inflation expectations are up.
“Assessments of personal finances dipped, due to modestly rising concerns over high prices as well as weakening incomes,” Surveys of Consumers Director Joanne Hsu said last month.
Long-run inflation expectations inched up from 3% in May to 3.1% in June.
PYMNTS Intelligence demonstrated the fact that living paycheck to paycheck has become a mainstay of the economy, as 60% of consumers have little, if anything, left over after the monthly bills are paid.
In a column last month, PYMNTS’ Karen Webster observed that trade-downs in merchants and brands across all income levels are becoming endemic as savings diminish and credit card outstandings rise.
Since March of 2021, prices have increased by 18.4%, with retail and grocery prices increasing by 19.3% and 20.7%, respectively. Alternatively, average earnings have increased by only 16.1% over the same period.
The pinch is being felt most keenly by U.S. consumers who earn $50,000 or less annually, live paycheck to paycheck and have issues paying their monthly bills. These 27 million people represent 8% of all consumer spending, and they have about $2,600 in savings. Paying for food eats up 25% of income, housing another 37%, and their monthly bills another 13%. Altogether, that accounts for 72% of their monthly income.
Clouds on the horizon look to be continuing to mass.
“Our results suggest that it will still be some time before real wages return to their pre-inflation surge level (first quarter of 2021), let alone catching back up to the trend they were on prior to the surge,” the Fed said in its blog post. “Indeed, we may have seen a permanent downshifting.”
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