Chart of the Week: Inflation and Hourly Earnings
Source: Bureau of Labor Statistics
The annual rate of inflation, as measured by the Consumer Price Index (CPI), exceeded wage growth, defined as the year-over-year change in average hourly earnings, in April and May 2026. The last time this happened was during the COVID-19 pandemic period of 2021 to 2023, when demand and supply imbalances pushed inflation as high as 9%.
Newly released data on average hourly earnings for June 2026 showed that wage growth increased slightly to 3.5%, but remains well below the level of inflation, which was 4.2% in May, and we expect inflation to remain close to that level in the coming months. The war with Iran has driven up fuel costs globally, and those price increases have made their way into goods, among other things, due to higher transportation costs. Workers’ incomes are not keeping up with the cost of living, and there are signs that the job market may not be as strong as the headline numbers suggest. The personal saving rate has declined to 2.5%, indicating that families are maintaining their spending by dipping into savings, but there’s not much buffer left.
The June employment report showed a slowdown in job growth, with a gain of just 57,000 and a downward revision to the prior two months of 74,000 jobs. Moreover, the job gains remain particularly concentrated in just a few sectors, notably health care. This month, there was a loss of 61,000 leisure and hospitality jobs, a surprise given the World Cup crowds. And yet, a negative surprise in just this sector was enough to bring down the national total. The unemployment rate declined to 4.2% in June, but this was primarily due to a three-tenths decline in the labor force participation rate. Excluding the pandemic-related dip in the labor force participation, the June participation rate of 61.5% was the lowest since June 1976. There were 832,000 fewer people in the labor force in June than in May. This reduction in the denominator lowered the unemployment rate.
MBA expects the Federal Reserve will remain focused on their price stability mandate and keep the federal funds rate unchanged through the remainder of this year but anticipates that their next move will be a hike in early 2027.
- Mike Fratantoni (mfratantoni@mba.org); Joel Kan (jkan@mba.org)
