US Consumers Feel Pinch as Wages Lag Behind Inflation
Consumer prices in the United States rose 3.4% in August compared to the previous year, while average hourly wages increased by only 3.1%. This narrow gap means American workers are earning more money but are able to buy less, as real wages (adjusted for inflation) fell by 0.1% from July to August and 0.3% year-over-year. This trend marks a reversal from April 2023 to April of this year, when wages outpaced price increases, allowing workers to regain purchasing power lost during the post-COVID inflation surge.
The shift is largely attributed to rising energy costs. Gasoline prices alone jumped 3.9% in August, accounting for over a third of the total price index increase that month. Diesel fuel reached $6 per gallon due to supply disruptions linked to conflicts in Iran and Ukraine. The impact on households is significant, with one financial institution estimating a 21% surge in gasoline prices in March alone, pushing its vehicle ownership cost index to a record high. In the car-dependent US, this is a difficult expense to cut.
The decline in purchasing power is affecting consumer behavior, with even high-income shoppers reportedly switching to discount grocery chains and warehouse stores. Internal spending data from a financial institution serving 15 million customers shows a widespread trend of consumers trading down to cheaper options across nearly all income levels. This behavior, driven by a desire to make every dollar count, explains mixed reports from retailers, with some experiencing strong sales and others facing weakness.
In contrast, Israel is currently experiencing the opposite trend. As of April, the average gross monthly wage was NIS 14,374, a 3.8% increase year-over-year. In real terms, this amounts to NIS 11,409, a 1.8% rise, indicating that purchasing power is still growing after accounting for inflation. Between February and April, nominal wages rose 5.9% annually and real wages 3.7%.
The divergence between the US and Israel is linked to their differing inflation drivers and labor markets. US inflation is primarily fueled by energy, to which American households are more exposed due to longer commutes and larger vehicles. Israel benefits from a tight labor market and high demand for workers, which sustains wage growth, particularly in the tech and finance sectors.
For Israeli investors, the US inflation figures are relevant as they influence the Federal Reserve's interest rate decisions, impacting global investments. Declining US consumer purchasing power also affects retail and consumer goods stocks, which are widely held by Israeli institutional investors. While Israel's real wage growth is currently positive, the article warns that a rapid increase in energy or food prices could reverse this trend, as seen in Japan where prices are outpacing wage growth despite the fastest wage increases since 1997. The US market anticipates wages and inflation to converge around early 2027, but this convergence is expected to stabilize, not improve, workers' real earnings.
