In May, workers experienced the first growth in their buying power in two years. The ongoing decline in inflation from its peak during the pandemic contributes to this positive trend.
Economists suggest that if this trend persists, it will benefit households. Households may rely more on their paychecks than savings or credit cards for everyday expenses.
This shift would provide a welcome boost to households’ financial stability and reduce reliance on debt.
Labor Bureau Statistics
According to the US Bureau of Labor Statistics, “real” hourly earnings rose by an average of 0.2% in May compared to May 2022. This data indicates a positive growth in workers’ earnings, reflecting a potential improvement in their financial situation.
Real earnings represent an average worker’s annual wage growth after adjusting for increased costs.
The consumer price index (CPI) measures these increased household goods and services costs. A positive number indicates an improved standard of living, while a negative number reflects reduced purchasing power.
According to the US Bureau of Labor Statistics (BLS), May’s figure marked the first positive annual reading since March 2021. Before this positive reading, workers experienced 25 consecutive months of declining buying power, the longest recorded stretch.
Aaron Terrazar, Glassdoor Chief Economist
Aaron Terrazas, chief economist at Glassdoor, attributes the positive change to decreasing inflation. Terrazas acknowledges the significance of real wages turning positive but notes that many individuals are still catching up from the past two years. The improved real earnings offer some relief, although workers are still recovering from the economic challenges faced during that period.
Wage Growth in 2021
Wage growth experienced a significant increase in 2021 due to a strong job market. As the US economy reopened after the Covid-induced slowdown, businesses had a high worker demand.
To attract talent from a limited pool, employers raised wages at an unprecedented pace.
Julia Pollak, chief economist at ZipRecruiter, noted that many companies implemented significant pay increases during the pandemic. Some workers benefited from strong pay growth, particularly those who switched to higher-paying jobs.
However, for the average person, wage gains were overshadowed by the impact of inflation. Food, rent, and fuel expenses increased faster than their paychecks for many households.
Wage Growth in 2022
Wage growth has also decreased, but at a slower rate, resulting in a net improvement in financial well-being for Americans in May compared to the previous year.
The consumer price index (CPI) peaked at 9.1% in June 2022, the highest in four decades. Since then, the CPI has declined to 4% annually.
The positive effect of Consumer Adaptability
The reversal in the trend is viewed as positive news for consumers. Despite the challenges, consumers have managed to weather the decline well.
Pollak states that consumers are now poised to become even stronger. The decline in inflation, coupled with relatively stable wage growth, offers a boost to households. This improved financial outlook suggests a positive trajectory for consumers’ economic situation.
Consumers’ resilience during the decline indicates their ability to adapt and navigate economic challenges. The current trend points toward a strengthening consumer sector.
The Buying Power of Households Improved
Additional economic measures indicate an improvement in household well-being. “Real” disposable personal income for Americans has consistently increased for 10 consecutive months.
According to Mark Zandi, chief economist at Moody’s Analytics, these measures, including interest and rental income, have shown strength. The inclusive nature of these data sets provides a more comprehensive view than wage growth alone.
This trend is highly encouraging for consumers, as it reduces the need to rely on savings or additional debt. Credit card debt in the US reached a record high of nearly $1 trillion by the end of March.
Interest rates on credit cards are currently at historic levels, exceeding 20%. Excess savings accumulated during the pandemic peaked in September 2021 at almost $2.5 trillion.
However, aggregate savings had significantly declined by April to $1.4 trillion. The continuation of positive real earnings and income would benefit households and the economy.
Experts suggest that sustaining consumer spending is crucial to avoid a recession. Real income data indicates that consumers will likely maintain a consistent spending pace.
Consumers serve as a protective barrier between recession and economic growth. The firm resilience of consumers is reflected in the holding of the protective barrier. These positive indicators offer optimism for the overall economic outlook.