US inflation eases slightly as wages lag, tightening household budgets

The Consumer Price Index showed a 3.4% increase in July from a year earlier, a modest slowdown from June, according to federal data released Wednesday. At the same time, a jobs report indicated annual wage gains fell to 3.2%, the weakest pace in five years.

Analysts said the divergence between price growth and wage growth is eroding disposable income. "People don't like inflation -- and they really don't like it when inflation eats away at their wage gains," said Harry Holzer, a Georgetown University public-policy professor and former chief economist at the U.S. Department of Labor.

Gasoline prices remain elevated, with the national average at $4.07 per gallon, a 36% rise since the February onset of the U.S.–Iran conflict. Daniel Zhao, lead economist at Glassdoor, noted that wage growth was already slowing before the energy price surge and that the recent price increases have largely offset any wage gains for the average worker.

The labor market also showed signs of weakening. The July jobs report recorded a loss of 23,000 jobs, reversing June's gain of 20,000, and included downward revisions that cut the prior two months' hiring totals by 103,000 positions. Lydia Boussour, senior economist at EY, attributed the slowdown in wage growth to a softer labor market, saying firms are being more selective and using wage compression to manage higher costs.

Household finances are feeling the pressure. The personal savings rate fell to 2.7% in June, the lowest level since 2022, while credit-card debt rose to $1.26 trillion over the three months ending in June, according to the New York Federal Reserve. Boussour said consumers are increasingly relying on savings and credit to cover higher expenses.

The inflation trend and its impact on wages are expected to influence voter concerns ahead of the November midterm elections, with recent polling indicating that the economy and high prices rank among the top issues for voters.