Inflation is outpacing wages again — and some economists see echoes of the 1970s

For a brief stretch beginning in mid-2023, American workers were winning the inflation fight. Wage growth edged ahead of rising prices, and household finances slowly recovered ground lost during the post-pandemic price surge. That progress is now gone. Inflation is running at 3.4% annually while average hourly earnings grew just 3.1% — and the gap is widening, not closing.

A substantial number of Americans are worse off. Their incomes are not keeping up with the price increases right now.— Heather Long, chief economist, Navy Federal Credit Union

The latest U.S. Labor Department figures show average hourly earnings rose just 0.13% last month — roughly five cents an hour, before taxes — while consumer prices rose 0.53% in September, according to estimates from the Federal Reserve Bank of Cleveland. That is inflation running at four times the pace of wage growth in a single month. Annualized, September's price increases came in at 6.5%, the Cleveland Fed estimates.

Over the past year, average earnings rose 3% while prices rose 3.6%, according to Labor Department data cited by MarketWatch. In purchasing-power terms, that effectively wipes out two years of workers' gains, putting real hourly earnings back to where they stood in the fall of 2024, according to MarketWatch.

The basics are that inflation is wiping out wage gains. April marked a clear turning point after a lengthy stretch in which wage growth had generally exceeded inflation.— Heather Long, chief economist, Navy Federal Credit Union

The central driver is energy. Diesel touched $6 per gallon for the first time, and gasoline prices rose 3.9% in August alone, accounting for more than one-third of the consumer price index's monthly gain, according to CNBC. The surge traces directly to supply disruptions from the war in Iran, which has also affected the Strait of Hormuz. Navy Federal previously estimated that gasoline prices jumped 21% in March, pushing its measure of car ownership costs to a record.

The Federal Reserve's preferred inflation gauge — the Personal Consumption Expenditures price index — rose 0.3% from July, holding the annual rate at 3.4%, according to Commerce Department data reported by CNN. Excluding food and energy, the core PCE index rose 0.2% from July, staying at an annual rate of 3% for a third consecutive month. The August report incorporated methodological revisions that lowered previously reported figures: July's annual PCE rate was revised down from 3.7% to 3.4%, and the core rate from 3.3% to 3%.

I think the inflation momentum doesn't look quite so scary after this report, perhaps.— Oliver Allen, senior US economist, Pantheon Macroeconomics

Job creation has also slowed sharply. Economists had forecast 94,000 new jobs in September; the actual figure came in at less than a third of that, according to MarketWatch. The unemployment rate remains low at around 4.1%. Within the jobs data, a footnote noted by MarketWatch: over the past year, nearly one million fewer native-born Americans hold jobs, while an additional half-million immigrants are employed.

Consumer spending has so far held up — inflation-adjusted spending rose 0.6% in August, the strongest monthly gain in more than a year, according to CNN — but Americans are financing that resilience by drawing down savings. The personal saving rate dropped to 4.1% in August, a nearly four-year low.

Households pinched by higher prices have been either reducing their monthly savings rate or relying more on credit.— Kathy Bostjancic, chief economist, Nationwide

For the last couple of years, we've seen spending grow faster than incomes — that's unsustainable over the longer run.— Gus Faucher, senior vice president and chief economist, The PNC Financial Services Group

The behavioral shift is already visible in where people shop. Navy Federal's internal spending data — covering about 15 million members — shows a broad move toward warehouse and discount retailers. Higher-income shoppers are migrating to Costco; middle- and lower-income households are anchoring at Walmart Supercenters, according to YouGov data cited by CNBC.

People who used to shop at Whole Foods are now at Costco, Aldi, and so you can see that people are still really trying to stretch every dollar.— Heather Long, chief economist, Navy Federal Credit Union

The 1970s comparison is not new, but the convergence of data points is giving it fresh traction. During that decade, real average wages fell 7%. Between January 1970 and January 1980, the S&P 500 returned just 4% above inflation in total — not annually — over the full ten years, before taxes and fees, according to data from NYU's Stern School of Business cited by MarketWatch. Holding 10-year Treasury bonds lost investors 35% in real terms over the same period. Energy stocks, by contrast, doubled in real terms, and gold rose more than 500% after inflation, according to data from Dartmouth finance professor Kenneth French cited by MarketWatch.

Analysts who draw the parallel point to gold, energy stocks, and Treasury Inflation-Protected Securities — TIPS — as the assets that held value during the 1970s and that may warrant a place in portfolios now. MarketWatch notes that TIPS have become cheap enough that shorter-term bonds now offer real yields — returns guaranteed to beat inflation — of around 2.5 percentage points annually, while longer-term TIPS carry real yields of up to roughly 3.3%, levels rarely seen.

Analysts who push back on the 1970s analogy point to meaningful differences: unemployment remains low, GDP growth is still positive, and the current inflation episode is supply-shock driven rather than embedded in wage-price spirals, according to the multi-source summary from financefeeds.com and congress.net. Potential productivity gains from artificial intelligence are also cited as a mitigating factor not present in the earlier decade.

Long's best-case scenario is that wage growth and inflation converge again around the start of 2027 — but she is clear-eyed about what that would still mean for households.

It's going to be tough for a long time. But that's still going to feel pretty miserable on Main Street if inflation equals wage growth.— Heather Long, chief economist, Navy Federal Credit Union

Why it matters — When inflation persistently outpaces wages, household purchasing power erodes in ways that compound over time — and the energy shock driving the current squeeze shows no sign of easing soon.

Reported by morningstar.com, cnn.com, cnbc.com, financefeeds.com, congress.net