Wages Are Up, Inflation Is Down
Historically, it’s rare for wages to outpace prices. This isn’t because it’s impossible, but rather a typical pattern that tends to undermine itself. When wages go up, demand increases. Unfortunately, inflation can diminish the promised benefits of those wage hikes. For real sustainable wage growth, something has to disrupt this cycle. This could involve a boost in productivity, increased investments in production, or changes in demand patterns.
Well, there seems to be that disruption happening now. In the first five months of 2025, average hourly earnings rose by 1.5%, while overall consumer prices only increased by 0.7%. On an annual basis, wages are up by 3.7%, while inflation is around 1.7%. This means real wage growth is just under 2%. This is actually the strongest improvement in purchasing power we’ve seen in years.
This isn’t just a statistical anomaly. The Consumer Price Index (CPI) only went up by 0.1% in May, marking the fourth month in a row of inflation staying below expectations. Core inflation followed suit. Categories that had seen significant price increases recently—like vehicles, airfares, and apparel—are now seeing prices decline. For instance, gasoline prices dropped by 2.6% in May and fell by 12% over the year. Overall, energy prices have decreased by 3.5%. While housing inflation is contributing to the CPI, it remains manageable with a modest monthly gain of 0.3%.
Your Salary Is Not Only Growing, It’s Stronger
The job market seems to be adjusting fairly well. Non-farm payrolls rose by 139,000 in May, and the unemployment rate is steady at 4.2%. In fact, wages have increased by 0.4% monthly, translating to an annual rise of 3.9%. Average hourly pay for non-exempt workers stands at $31.18. These numbers indicate robust earnings, and importantly, they’re not just fading away at the register.
The slight drop in the labor participation rate—down by 0.2 points to 62.4%—has often been misinterpreted. Much of this decline reflects people leaving due to illegal immigration and not a weakening of the domestic labor supply. While there’s been a slight decrease in the employment-to-population ratio, there are no signs of a widespread labor surplus. On the contrary, wage growth remains solid, and job opportunities continue to expand in essential domestic services like healthcare and hospitality.
What we’re witnessing now is what economists and central bank officials often aspire to but rarely achieve: inflation is falling while wages are rising. This isn’t a mystery but an indication that supply is catching up, rather than demand weakening. With improved productivity growth and declining energy prices, investment is finally shifting back to the real economy, focusing on sectors like logistics, energy, and domestic production.
Time for the Fed to Adjust
The Federal Reserve should consider tweaking its policies, as it claims to be “data-dependent.” The risk of inflation has subsided. Wage growth appears stable without spiraling out of control. The economy seems to be in a stable condition rather than erratically turning. President Trump hesitated to advocate for cuts, worried that short-term improvements in inflation could lead to significant risks. However, given that we’ve had several months of positive inflation data, he might reconsider. Current cuts could affirm the notion that monetary policy still plays a beneficial role in the economy, rather than the reverse.
Real wages are on the rise. Prices are not dictating otherwise. The economy shows signs of recovery, and this isn’t just theoretical. It’s happening now, on the ground, in real time. American workers have achieved a noteworthy status in the past, and there’s no economic rule suggesting this must be a temporary condition.
