Federal Reserve Chair Jerome Powell recently stated that the best way to address America's high cost of living is for workers to earn higher wages. However, this solution appears to be hitting roadblocks.
In recent months, U.S. job market growth has stalled, with wage increases declining for over three consecutive years. On Tuesday, the Bureau of Labor Statistics will release long-delayed employment reports for October and November, which may provide a clearer picture of the labor market.
Although U.S. inflation has returned to relatively normal levels for over a year, and wage growth has outpaced price increases for more than two years, cost-of-living concerns remain the top issue in poll after poll. This is because the price shock from inflation surging to a 40-year high years ago has yet to fully dissipate for many Americans.
Economists, business leaders, and policymakers are debating solutions—such as increasing healthcare and housing subsidies or lowering tariffs—to make life more affordable. But Powell offered a simpler approach while explaining the Fed’s recent rate cuts: raise wages directly.
"To truly ease cost-of-living concerns, we need sustained real wage growth over the coming years," Powell said at last week’s post-rate-cut press conference. "We must balance inflation control with supporting a strong labor market and wage growth, so workers can regain financial security."
The Fed’s theory is that lower borrowing costs from rate cuts free up corporate funds for hiring. A stronger job market gives workers more options, forcing employers to raise wages to retain and attract talent.
Powell believes that if this trend continues, Americans will gradually adjust to higher prices—as wages rise, price pressures will feel relatively lighter.
But execution is easier said than done.
Year-over-year hourly wage growth peaked at 5.9% in March 2022 but has since slowed to just 3.8%. This decline is partly due to inflation cooling, reducing cost-of-living salary adjustments.
A deeper factor is the tightening job market. Hiring has nearly stalled, with net job losses in June and August. Since 2025, the U.S. economy has added just 76,000 jobs per month on average—barely keeping pace with population growth and less than half the average monthly gains in 2024.
The post-pandemic era of worker leverage—marked by "quiet quitting" and job-hopping—has officially ended. Even dissatisfied employees are staying put: October’s quit rate hit a five-year low, per recent BLS data.
If companies aren’t worried about losing workers, they lack incentive to offer significant raises.
The good news? Hiring intentions may be rebounding. October job openings rose to a five-month high, and 19% of small businesses plan to hire in November—the highest level in three years, per the NFIB’s optimism index.
The bad news? Tariffs continue threatening corporate profits and consumer prices. JPMorgan notes that while businesses absorbed ~80% of Trump-era tariff costs, shrinking profit margins will force firms to pass most of these costs onto consumers via price hikes next year.
Thus, even if the job market rebounds and wages rise, persistent inflation could erode those gains. Raising wages alone may not solve the cost-of-living crisis.
Wary of resurgent inflation, the Fed has signaled a prolonged pause in rate cuts. Since monetary policy takes months to impact the economy, this pause may deny the labor market much-needed support.
For the U.S. to escape its cost-of-living trap, recent trends must reverse. Clues may emerge in Tuesday’s jobs report and Thursday’s inflation data—but don’t expect quick fixes.
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