Government data released this week indicated that consumer prices in the United States rose 3.4% in July compared to the same month last year, exceeding the 3.2% increase in average hourly earnings over that period. This marks the fourth consecutive month in which real wages — the purchasing power of workers’ pay — have declined, highlighting ongoing challenges for American households.
Historically, such sustained declines in real wages have been uncommon. Prior to the COVID-19 pandemic, real wage growth fluctuated with economic conditions but rarely declined for more than a month or two at a time. However, the pandemic and the subsequent surge in inflation triggered the sharpest drop in inflation-adjusted wages since the 1980s. Between February 2021 and June 2022, the average worker’s purchasing power decreased by more than 4%.
The recent downturn, partially driven by rising energy costs linked to geopolitical tensions in the Middle East, has been less severe but compounds earlier losses in worker income. This situation emerges amid broad concerns over affordability and cost of living, contributing to a decline in consumer confidence. According to Jared Bernstein, an economist at the Stanford Institute for Economic Policy Research and former economic adviser to the Biden administration, falling real wages significantly impact living standards for working Americans already facing financial stress.
Despite efforts from both the Biden and Trump administrations to frame the economic narrative positively, public perception remains largely negative. Political polling indicates dissatisfaction with the current administration’s handling of the economy, traditionally viewed as a strength.
Reflecting these sentiments, the University of Michigan reported a drop in its consumer sentiment index in early August, partly reversing the modest improvement seen in June and July when gas prices eased. Only 8% of survey respondents expect their income growth to surpass inflation in the coming year, down from 18% at the end of 2023.
Household financial strain extends beyond wages. Inflation-adjusted personal income after taxes — a broader measure that includes retirement benefits and rental income — fell in the second quarter. Additionally, the national savings rate has declined as many Americans draw on savings to maintain their living standards.
Even if wage growth picks up in the future, restoring consumer confidence may prove difficult. During the latter part of the Biden presidency, wage increases frequently outpaced inflation, yet consumer sentiment showed only limited improvement, underscoring the complex dynamics between income, inflation, and public outlook on the economy.