Will Wages Catch Up with Inflation? The Answer is Unclear

At first look, the numbers seem promising.

The latest available data shows the US rate of inflation at 3.7 percent for the year, holding steady over the short term and continuing a longer-term downward trend. And in an August survey conducted by Mercer, American employers indicated plans to boost wages for nonunionized workers by 3.9 percent in 2024.

Last month, the Federal Reserve announced that it will hold off on further rate hikes while it evaluates current rates of economic growth and unemployment – while stressing a commitment to bringing inflation down to 2 percent.

Does that mean wages will get ahead of inflation next year?

Not necessarily.

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For one thing, there are no guarantees that the 2 percent figure will be reached. And even if the current 3.7 percent rate holds steady, merit increases are expected to drop from 3.8 percent this year to 3.5 percent next year. While employees in the energy, insurance and consumer goods sectors are (for now, at least) projected to see merit increases of 3.7 percent in 2024, the tech and medical industries are projected to come in at 3.3 and 3.1 percent, respectively.

For another, that stated expectation of 3.9 percent wage increases from the Mercer survey includes both merit pay and promotion-related increases. So if you don’t get a promotion in 2024, your chances of meeting even that 3.9 percent figure drop.

Connected but different: the drivers behind inflation and wages

The biggest reason, though, is that inflation and salaries are influenced by different – and often unpredictable – factors.

Inflation is tied to the cost of products – and it hits hardest when it affects necessities such as food, housing and energy. People can forego big-ticket discretionary purchases and implement some cost-cutting measures – such as buying clothing secondhand, cutting down on unnecessary driving and buying store-brand groceries – but necessities are still necessities.

So if a key supplier of a commodity cuts production – as OPEC+ did in June, announcing last month that the cuts would extend through 2024 – that causes prices to go up. And when oil prices go up, so do transportation costs, with a knock-on effect that continues to retail shelves.

Wage increases, on the other hand, are inextricably linked with the employment rate. When there is high unemployment, employers can implement smaller increases – or forgo them entirely – because the pool of candidates is larger. Conversely, a tight market forces employers to pay more to retain their workforces.

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