A closer look at wage measures hints at why consumers still feel gloomy

Wage growth has been slowing down in recent months, but according to last month’s jobs report, it’s still been tracking ahead of the rate of inflation for the last year.

As of May, average wages had risen about 4% over 12 months, while the consumer price index showed inflation at 3.3% over the same period. That means workers’ spending power should be improving, yet measures of how people feel about the economy aren’t totally reflecting that.

Consumer sentiment hit a seven-month low in early June. And survey after survey have shown Americans feeling a bit pessimistic about the economy.

You can think of workers’ spending power as a horse race between wages and inflation, said Bankrate analyst Sarah Foster.

Out of the gate in 2021, “this inflation horse started running a lot faster,” she said. But “now wages are running a lot faster in this scenario.”

By some measures — like the one in the monthly jobs report — that wage horse has caught up and even passed the inflation horse.

But the Federal Reserve is watching a different horse: the employment cost index, which does a better job of tracking wages for the same job over time. That horse is still behind.

“There is ground to be recovered, and it’s probably why many Americans just feel so down about their income,” Foster added.

We also have to remember that the average wages in the monthly jobs report are just that, said Liz Wilke, principal economist at payroll services firm Gusto. “That average masks a lot of variation in the experiences of both businesses and workers,” she said.

For instance, the small businesses Gusto works with have raised pay by just 1% over the last year, which is actually a decline when you adjust for inflation. Meanwhile, in industries that are still struggling to find workers, like food services, wages have grown much faster.

“So how it looks to you really depends on what industry you are in,” Wilke said.

There’s also variation by income level, said Valerie Wilson, director of the Program on Race, Ethnicity, and the Economy at the Economic Policy Institute.

“While wages have grown across the board, we’ve actually had the strongest wage growth among the lowest earners,” she said.

But their baseline incomes are lower, so any increase in expenses is a bigger burden.

“Those workers are more exposed to the high price of essentials like food and shelter,” said Michael Strain, director of economic policy studies at the American Enterprise Institute.

He stressed prices for most things have increased more slowly — not gone down — so they continue to give consumers sticker shock.