Americans are back on a hamster wheel as wages fall behind

Earnings for American workers grew by less than expected in April, a report Friday showed, which means that, pending the release of inflation numbers next week, we’ll probably discover that consumer prices are now going up faster than wages... again. That will prove extremely disheartening for households still trying to find their footing after the 2021-2023 inflation surge, as well as for the many Americans who voted for President Donald Trump on the bogus promise that he’d slay the inflation scourge. Instead, he’s clearly and demonstrably reignited it.

All told, the 3.6% (1) growth in hourly earnings from a year earlier was softer than the 3.8% increase that economists surveyed by Bloomberg expected, weighed down in part by weak gains in education and healthcare wages. Compare that to the 3.7% year-over-year increase in inflation that economists expect from the next Consumer Price Index update, and Americans are losing purchasing power.

I don’t expect attitudes to change just because real earnings growth slips to zero, but consumers have to be getting frustrated after some five years of treading water. And indeed, a preliminary report from the University of Michigan on Friday showed that U.S. consumer sentiment fell to a fresh record low.

If you go back to 2019 before all the chaos in the labor market and inflation started, consumer prices are up by a cumulative 28% (call it 28.5%, give or take, after next Tuesday’s number) and average hourly earnings are up about 32%. Americans have been spinning their wheels for what works out to maybe a 0.5% annual increase in purchasing power — simply not good enough for the world’s most dynamic economy. And that’s at the aggregate level. Millions of Americans don’t have a job and are struggling to break into the "no hire, no fire" labor market.

In the past 16 months, Trump’s policies have brought inflation to the fore with ill-conceived tariffs that lifted core goods and his misadventure in Iran, which caused oil prices to soar back above $100 a barrel. For all the potential for both of those shocks to fade, the risk is that such "shocks" are becoming a lot less shocking. They’re becoming the norm. There’s always another one waiting around the corner, ready to further erode Americans’ faith in low inflation and stable real wage gains.

At the Federal Reserve, the next steps are particularly perilous. Policymakers need to decide if they should follow policy orthodoxy and "look through" the latest round of energy-driven prices increases, or consider raising interest rates to prevent this resurgence of inflation from getting into the bones of the economy — into our psychology and, above all, our labor market. One way or the other, that probably means that real wages are going to remain flattish for a while. If nominal wages start picking up in response to inflation, policymakers would view that as a bad thing — a sign that inflation is becoming embedded — and act to tamp it down with even higher rates.

There was some good news in Friday’s Bureau of Labor Statistics report, too. The labor market itself is holding up better than expected, with unemployment stable around 4.3% and employers adding a net 115,000 to payrolls last month. That, at least, gives policymakers a longer leash to solve the inflation problem without worrying about causing a recession. For Kevin Warsh, who is all but certain to replace Jerome Powell as Fed chair this month, that flexibility is critical.

But it doesn’t change the fact that Americans are back on the proverbial hamster wheel, working hard day after day only to end up exactly where they were months and years earlier. And there’s no sign of an improvement in the real earnings picture anytime soon.

(1) This number is typically reported on a seasonally adjusted basis, whereas inflation is reported NSA. Average hourly earnings would be up 3.5% year-over-year NSA.

This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Jonathan Levin is a columnist focused on U.S. markets and economics. Previously, he worked as a Bloomberg journalist in the U.S., Brazil and Mexico. He is a CFA charterholder.