Workers’ wages will take longer to recover from inflation than previously expected, as actual prices rose more than projected and worker compensation fell short of expectations so far this year.
Pay will finally outpace pandemic-era inflation in the second quarter of 2025, a timeline that was pushed back from the fourth quarter of 2024, according to a recent Bankrate analysis of federal inflation figures and employee wages and salaries released Monday.
Since January 2021, inflation has risen 20%, while wages increased 17.4% in the same period, according to Bureau of Labor Statistics data for the second quarter of this year. While Bankrate had previously estimated that wages would finally catch up with inflation by the end of this year, a slowing job market has made that scenario less likely, the personal finance firm found.
“Our projections were never meant to be a forecast,” said Bankrate analyst Sarah Foster in a statement. “They were simply a model for how things would look if the economy kept evolving the way it had been. But thanks to the slowdown we’ve already seen in the job market, wages are on pace to recover from inflation later than they were expected to at this point last year.”
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The cooling U.S. jobs market has signaled that it’s time for the Federal Reserve to cut interest rates — a move it’s largely expected to make next week. Employers added 142,000 jobs last month, the BLS reported last Friday, and the unemployment rate ticked down to 4.2% from 4.3% a month prior. That’s still a second straight month of an unemployment rate higher than the 4.1% maximum projected by the Fed.
“The Federal Reserve is about to cut interest rates to ensure they aren’t slamming the brakes on economic growth and the job market too much,” Foster said. “Americans’ paychecks are what’s at stake if the Fed keeps interest rates too high for too long. Inflation will keep harming Americans’ finances until their incomes fully recover, but if the job market and economy nosedives, it puts their paychecks at risk of catching up much more slowly, if at all.”
Inflation has also shown considerable signs of cooling, with consumer prices rising 2.5% in the past year and continuing to trend toward the Fed’s 2% target. Core inflation, which measures price increases across all items except food and energy, came in slightly hotter than expected at 3.2% in August.
The central bank is widely expected to carry out a 25-basis-point decrease to the federal funds rate, which has remained at a 23-year-high of 5.25%-5.5% since July 2023, at its next meeting on Sept. 17-18.