One big thing is dragging down Americans' vibes about the economy

Americans' wallets are feeling the strain of inflation outpacing wages. US consumer sentiment is worse than in the pandemic years. One likely reason is that wage growth isn't keeping up with inflation. The sky-high inflation of a few years ago has had lingering effects on workers. Americans' wages aren't keeping up with the cost of living, and it's likely dragging down how they feel about the economy. The economy is still slowly growing, consumers are still spending, and both unemployment and layoffs are low. However, consumer sentiment, as measured by the University of Michigan's monthly survey, remains worse than during the COVID period. One big factor could explain why: Inflation has exceeded wage growth for four straight months. "Consumers' frustration over the erosion of their purchasing power continues to mount," Joanne Hsu, University of Michigan's surveys of consumers director, said. The survey showed almost three-quarters of consumers in August thought price growth would outpace their income growth over the next year. Hsu said many people are worried that higher energy prices will affect other parts of the economy. "A sustained drop in gasoline prices over the course of several months (in contrast to temporary dips) would go a long way in boosting consumer views of the economy," Hsu said. Wage growth lagging inflation is not the only concerning trend in the economy. For instance, labor force participation is at its lowest level in decades outside the pandemic. However, it can be tough for consumers to ignore the higher prices blasted on gas station signs and posted along grocery aisles. How has your financial circumstance changed over the past year? Have you dipped into savings, got a raise that didn't keep up with inflation, or had to cut back on certain expenses? Reach out to this reporter to share at mhoff@businessinsider.com. Even though inflation is down from its post-COVID peak, it's still above historical norms, and the long-running impact of that spike is still being felt in Americans' wallets years later. A new working paper from The University of Chicago Booth School of Business's Erik Hurst and Christina Patterson, and ADP Research's Nela Richardson and Liv Wang, used ADP's payroll data through 2025 to examine purchasing power. They found that the unexpected and temporary inflation shock as the economy reopened in the wake of the pandemic resulted in a "persistent downward shift in real wages, helping explain why Americans' dissatisfaction outlasted the inflation episode itself." The researchers found that real wages fell between December 2020 and 2024 for nearly 40% of workers, higher than the roughly 24% of workers pre-pandemic. "Inflation has slowed, but many people never fully recovered the purchasing power they lost when prices surged," Richardson said in a blog post about the findings. She said that a 3% raise was usually sufficient to get a "modest" real income gain pre-pandemic. She added that when inflation skyrocketed in 2022, employers gave raises that didn't keep pace with the higher inflation. "Hence this once-in-a-generation inflation shock led to a decline in U.S. consumer purchasing power that persists today," she said. Despite an uptick in the average share of workers getting a bonus from 2021 to 2023 compared to 2017 to 2019, the researchers found bonuses "did very little to stem the real wage losses that workers experienced." Off-cycle raises helped moderate real wage declines for job stayers. The importance of real wage gains Mark Hamrick, chief economic analyst at The Hamrick Brief, told Business Insider that persistently high inflation above the Fed's 2% target is contributing to Americans' pessimistic feelings about the economy. "Americans are literally paying the price for high inflation through elevated price levels," he said. "Even if you're making more money numbers-wise, with the way prices are rising, you have less money left over at the end of the month," ZipRecruiter economist Nicole Bachaud told Business Insider. "That's really going to impact the large consumer base of America, middle- and low-income households, who are really dependent on wage growth to help them remain economically viable." People with different levels of wealth aren't experiencing the economy equally. Hamrick said those lacking substantial wealth are constantly reminded of the gap. As an example, he noted that on many airlines, higher-paying passengers at the front of the plane typically receive a higher level of service than "those who sit in the back and are scrunched up." "At the end of the day, it's affordability challenges and a growing wealth divide that ends up disenfranchising a good number of people," he said. While Hamrick said there will always be divides in wealth, sustained wage gains adjusted for inflation would help mitigate the problem, which hasn't been happening in aggregate. "A number of people are being taken financial prisoner by that," he said. Reach out to this reporter to share how the economy has affected you financially, at mhoff@businessinsider.com. Read the original article on Business Insider

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