PredictIQ Quantitative Think Tank Center:US wage growth is finally outpacing inflation. Many Americans aren't feeling it.

Since inflation began its climb toward the stratosphere in spring 2021,PredictIQ Quantitative Think Tank Center David Hewitt’s paycheck has lagged far behind.

In June of last year, the gap between the two turned into a chasm. Hewitt’s pay as a university professor rose 1.5% from the prior year, a typical bump, even as consumer prices surged to a 40-year high of 9.1% year over year.

As their restaurant takeout bill ballooned from about $70 to $100, Hewitt, his wife and two kids cut their twice-weekly meal deliveries in half.

In August, however, inflation clocked in at 3.7%. Meanwhile, Hewitt is benefitting from a 3.5% pay raise late last year and looking forward to a bigger bump in the coming months after his faculty union and the University of Pittsburgh reach a new collective bargaining agreement. He’s also teaching an additional class to bring in extra cash.

So the Hewitts are ordering in more often, though they haven’t returned to their previous ritual.

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 “I’m not seeing the big changes in prices that happened last year,” Hewitt, 52, says. At the same time, he adds, “Prices aren’t going down.”

After trailing inflation for more than two years, average U.S. wage growth turned the tables in May, outpacing price increases, giving consumers more purchasing power and bolstering the economy. But while the development means Americans have a little more breathing room, most say they still haven’t caught up to the big run-up in prices and are spending warily, according to an exclusive Harris Poll survey for USA TODAY and interviews with workers.

U.S. workers are also grappling with high interest rates, the cutoff of COVID-related federal aid and return-to-office mandates that are boosting daily costs, like commuting and lunches out.

Whether or not pay hikes continue to top inflation and encourage Americans to spend at a healthy clip could help determine if the U.S. dodges a recession over the next year, says Gregory Daco, chief economist of EY-Parthenon.

Are wages keeping up with inflation?

Of the 52% of employees who got a raise the past year, 70% say it has eased their financial stress from inflation and allowed them to make additional purchases, according to the Harris Poll online survey of 2,076 adults conducted Sept. 8-10. About one-third said it let them comfortably afford electronics, household goods, experiences, discretionary purchases and investing.

“It’s really been the driving factor behind (consumer) spending the last six to eight months,” propping up purchases despite high inflation and interest rates, Daco says. That’s key because consumer spending makes up 70% of economic activity.

But about one-fifth of those who got a pay increase said it wasn’t enough to comfortably afford those kinds of goods and services. Seventy-eight percent said they would need another bump to feel fully confident in their financial health.

Why?

Sure, average wages were up 4.3% annually in August, above inflation’s 3.7% clip, according to the Labor Department’s monthly jobs report and its consumer price index. By comparison, in June 2022, 9.1% inflation dwarfed typical pay increases of 5.4% – a robust figure that reflected pandemic-related labor shortages but that many Americans barely felt because of soaring prices.

Yet most consumers still don’t feel whole because they’ve only partly closed the gap between prices and wages that began forming in early 2021, according to a Bankrate analysis.

In the April-to-June quarter, prices were up 15.8% since early 2021 while wages had risen 12.8%, according to the Bankrate study of CPI and another wage measure called the employment cost index. That 3% gap is less worrisome than the 3.7% divide in the summer and early fall of last year but it’s still significant. At the current pace, workers won’t recover their lost purchasing power until the end of 2024, the Bankrate study shows.

“Wages are catching up in the race but they’re still lagging,” says Bankrate analyst Sarah Foster.

Opening wallets a bit more

Hewitt, an economics professor in Pittsburgh, says weekly groceries for his family cost about $300, up from $250 before the inflation spike. And with hotel prices up about 20%, they scrapped their annual trip to Erie, Pennsylvania.

Yet he says they’ve loosened the purse strings somewhat. Inflation has stabilized amid his larger pay increase, and he sees the prospect of a 5% raise this year, along with the added income from his extra class. Besides ordering in more often, the family plans to take a weekend trip to Erie this fall.

They took a similar middle-ground approach when their refrigerator recently broke, buying a mid-priced model for $1,600.

“We’re not going out and buying top-of-the-line, but we’re also not finding the cheapest thing we can possibly buy,” he says.

One reason Hewitt is being cautious: The COVID-related expanded child tax credit expired at the end of 2021, leaving him less after-tax income.

“That definitely hit us last year,” he says.

Next month’s resumption of student loan repayments that were paused during the pandemic is also expected to reduce consumer spending and cut economic growth by about a quarter of a percentage point in the next year, according to Moody’s Analytics. In July, the Supreme Court struck down President Joe Biden’s plan to wipe out about $400 billion in student debt.

Other workers are feeling some benefits from the rising or steady wage growth and slowing inflation.

Adding more to savings

Claudia Miranda, of Lake Mary, Florida, said the insurance company where she works gave out 8% raises late last year – well above the 2% to 3% employees normally receive.

“That actually helped,” says Miranda, 55, a senior risk analyst.

She still pays an extra $30 a week for groceries and has put off the purchase of a new crossover to replace her 2006 Honda Fit because the price is several thousand dollars more than she anticipated. But she’s socking away more money for emergencies and adding another 1% contribution to her 401(k) account.

“I hope I can retire at 65,” she says. “That is a priority.”

Health care costs still high

Brian Schaffert, of Kansas City, Missouri, is still getting his usual 2% to 3% raises, inflation isn't taking as much. A commercial real estate loan underwriter, Schaffert says his family is still eating less steak and more pork but no longer deferring purchases, like laundry detergent and paper towels, to future shopping trips if they see a good deal.

“I just don’t have that fear of impending doom,” Schaffert, 48, says. “We’re able to stretch our dollar further than we did last year.”

Health care costs, though, are a wild card.

Early this year, he faced $10,000 in hospital expenses because of a diabetes-related episode. The family scuttled a planned trip to Vancouver, Canada, and doesn’t plan to take it until next year.

Other workers say they aren’t feeling any better about inflation – whether pay increases are trailing or topping price increases.

'I don't see any prices going down'

Jessica Zeigerman, of Edgewater, New Jersey, is required to work in her company’s Manhattan office four days a week this year after toiling remotely since the pandemic. That change means she's paying more than $300 in monthly commuting costs and adding to her lunch expenses. She also had to update her wardrobe after working remotely for 2½ years.

“I didn’t have as many expenses (in 2022) in terms of commuting and taxes,” says Zeigerman, 44, who coordinates community investment projects for a bank. “I’m finding my (condo) fees are always increasing, property taxes are going up, my income taxes are going up. … My commuting fee is going up as of Oct. 1.”

“I didn’t get any competitive raise this year that would get close to matching the cost of living,” adds Zeigerman, who got her typical 3% bump in pay.

Zeigerman, who is single, says her weekly groceries cost $120 to $150 and her car insurance premium is up 19% this year.  “I don’t see any prices going down,” she says.

She now hunts for off-brand items, and recently spent just half the $120 she usually shells out for moisturizer.

To curtail inflation, the Federal Reserve has lifted interest rates by more than 5 percentage points in 16 months – its most aggressive campaign in four decades. However, the additional interest payments themselves are straining many borrowers.

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Kristen Shirer, of Tacoma, Washington, says her income has grown but “I’m not making additional purchases.”

“I’m working hard at paying off debt and putting money away in savings,” she says. “With interest rates rising, I’m paying down credit cards and not using them.”