Why Wages Don’t Feel Like They’re Keeping Up with Inflation

Despite economic data showing that wages have outpaced inflation in recent years, many Americans feel that their paychecks aren’t stretching as far as they used to. This disconnect can be attributed to several factors:

Consumer Sentiment and Inflation Perception

• Consumer sentiment has fallen in recent months, with indices like the University of Michigan’s Index of Consumer Sentiment indicating low confidence in the economy.
• Many Americans report feeling that their bank accounts are not keeping pace with inflation, despite data suggesting otherwise.
• The perception of rising prices weighs heavily on consumer sentiment, even if actual inflation rates are relatively low.

Different Measures and Time Periods

• Economic analysts often use different measures and time periods to assess wage growth and inflation, leading to varying conclusions.
• Hourly wages have generally outpaced inflation since early 2020, but not since the second quarter of that year, when earnings saw a significant surge.

Political Rhetoric and Blame

• During the 2022 election, both presidential candidates attempted to persuade voters that inflation concerns were either over or under control.
• Consumer discontent with rising prices contributed to the outcome of the election, with many blaming the incumbent Democratic administration.
• Political rhetoric can reinforce the perception of inflation and place blame on external factors.

Psychological Differences between Inflation and Wages

• Psychologically, consumers tend to view inflation as something imposed upon them, while they perceive higher wages as something they have earned.
• This difference in perception influences the emotional response to both economic indicators.

Income Distribution and Inflation Impact

• While wages may have risen faster than inflation on average, this does not apply to all workers.
• Many Americans, especially lower- and middle-income earners, saw their inflation-adjusted wages decline or stagnate during the pandemic.
• Inflation disproportionately affects those who spend a significant portion of their income on necessities like food and housing, which have experienced higher price increases.

Pandemic-Era Inflation and Consumer Behavior

• The surge in inflation during the pandemic was unprecedented, especially for younger generations.
• This sharp increase in prices left a lasting impact on consumer behavior and made people more sensitive to price changes.

Political Polarization around Inflation

• In the lead-up to the 2024 election, Republican consumers expressed greater concern about inflation than Democrats.
• After the election, Democrats became more pessimistic about inflation, while Republican expectations declined.
• Political polarization influences how consumers perceive and react to economic data.

Conclusion

The apparent disconnect between wage growth and inflation perception is a complex issue influenced by various factors. Consumer sentiment, psychological biases, income distribution, and political rhetoric all play a role in shaping how individuals experience the economy and respond to economic indicators.