US inflation rose 3.3% annually last month, nearly catching up to the 3.5% growth seen in average hourly earnings for March. Government data released Friday shows that recent price volatility is beginning to outpace worker compensation.
A 0.9% price hike between February and March pushed real average hourly pay into negative territory. Workers earned $0.07 less per hour than the previous month as rising gas prices pressured budgets. This monthly swing effectively canceled out recent gains in real wages.
The 0.9% price jump between February and March represents a significant reversal for workers. This spike, driven largely by the energy sector, stripped away the progress made during the early part of the year.
Heather Long, chief economist at Navy Federal Credit Union, said inflation is already erasing much of the recent pay increases.
“Inflation is almost eating up the entirety of Americans’ wage gains already,” Long said in a note. “It will almost certainly mean inflation is above wages by April or May. That is painful.”
Long noted that the current economic environment forces many Americans to make difficult decisions about which expenses to prioritize and which to skip.
Wealth gap widens
The gap between rising costs and stagnant pay affects different income groups unequally. An analysis from the Bank of America Institute highlights a widening disparity in how inflation affects various households.
High-income households saw after-tax wage growth of 5.6% in March compared to the previous year. In contrast, low- and middle-income households saw much smaller gains of 1% and 2%, respectively.
The Bank of America Institute analysis shows that the 5.6% growth for high-income earners provides a buffer that lower-income families lack. For those in the 1% and 2% growth brackets, the cost of essential goods is rising at a rate that far outstrips their paycheck increases.
Michael Pearce, chief US economist at Oxford Economics, expects these energy-driven price shocks to dampen consumer spending through the first half of the year.
Pearce warned that the mounting hit to real incomes from energy costs will contribute to weaker economic activity. He also noted that a further spike in oil prices or a stock market correction risks a scenario where spending falls outright.
