Inflation is now rising faster than your salary. Here's how long that could last.

MW Inflation is now rising faster than your salary. Here's how long that could last.

Andrew Keshner

'Americans will remain financially squeezed for a while'

The price squeeze that Americans are feeling has reached a level last seen three years ago.

Many U.S. consumers are already strapped for cash, saving little and feeling the sting of higher prices at the gas pump, as the purchasing power of their paychecks has flagged.

Now in the race between paychecks and prices, paychecks have fallen behind.

Inflation climbed at a year-over-year rate of 3.8% in April, fueled by a jump in the cost of energy as the effects of the war in Iran continue. Meanwhile, wage growth increased by 3.6%.

The last time overall inflation rates surpassed the increase in average hourly earnings on an annualized basis was in April 2023, according to data from the Bureau of Labor Statistics.

Here's the tough news: This could be the new normal for a while. Inflation rates may continue to outrun wage growth for the near future, economists said following the release of Tuesday's data. Many employees and job seekers don't have a lot of leverage when it comes to their pay - and we're in a time of high prices.

"Americans will remain financially squeezed for a while," said Heather Long, chief economist at Navy Federal Credit Union. She's expecting inflation to peak in the summer, to be followed by a slow retreat.

"Meanwhile, wage growth is likely to stay about the same for a while. There just won't be much relief this year, even if the war ends and the Strait of Hormuz reopens," she told MarketWatch. That's especially the case for workers in the lower income ranges of a K-shaped economy, Long added - one in which higher earners are doing well, while those with lower incomes struggle. Their inflation-adjusted pay "will be flat or slightly negative in 2026," she said. "That's the squeeze."

Last month, wage growth for lower-income households increased 1.5% year over year, according to Bank of America (BAC) data released on Tuesday, while higher-income households saw their wages climb by 6%. It was the widest gap in wage growth since the bank's researchers started measuring the metric in 2015.

At Navy Federal, Long is already seeing members stashing more money in checking accounts in preparation for covering costs. "The rest of the year will be about belt tightening," she said.

People making $50,000 or less could find their income growth falling behind inflation, while price increases could neutralize the pay gains for households in the $50,000 to $100,000 range, Long said.

Other economists see the same trend taking shape. At this point, inflation rates seem poised to outpace wage growth for most or perhaps all of 2026, said Bernard Yaros, lead U.S. economist at Oxford Economics.

Gas prices should slowly decline as the year continues, he said. But consumers have to face the added costs resulting from more expensive diesel fuel and higher fertilizer prices, two major expenses that get baked in to the prices of everyday necessities.

Diesel prices are now nearing record highs, experts note.

When gas prices shoot up, people can find ways to ease the sting a bit, Yaros noted. Some research already shows that lower-income drivers are beginning to cut back on buying gas - although they're still spending more on it than they were before the start of the Iran war in late February.

Cutting back on expenses is harder, however, when higher energy costs seep into other prices. "When it broadens out, it makes it much more difficult to avoid for consumers. That's really the concern going forward," Yaros said, adding that it's especially challenging for lower-income households.

The challenge of finding a bigger paycheck

If paychecks don't offer the purchasing power they used to, workers may look for better-paying jobs. However, finding one may be easier said than done.

Many workers aren't leaving their jobs, and many employers aren't hiring. That means job candidates may be in for a tough, lengthy search, even as the economy added 115,000 jobs last month, topping forecasts. There have been some encouraging signs, according to Cory Stahle, senior economist at job-search platform Indeed. Nevertheless, "the labor market is still broadly stuck in low gear."

Tuesday's wage data is a "meaningful signal," said Ger Doyle, regional president for North America at ManpowerGroup $(MAN)$. For now, though, it's one snapshot instead of a confirmed trend, he noted.

If higher energy costs and steeper expenses continue, it's possible inflation rates will beat pay growth "intermittently over the coming months," Doyle said.

The bigger story is that there's no longer a broad-based guarantee of larger paychecks. Instead, paychecks will grow mostly on a case-by-case basis. So if employees and job seekers hope for wage gains, they will have to look hard at themselves.

"Wage growth is becoming more targeted, more deliberate and more closely connected to skills and productivity than to overall labor-market tightness," Doyle said.

At Indeed, Stahle sees an "elevated" chance that the cost of living outstrips pay raises in the coming months.

"Even if the war ends quickly, the economy will likely take some time to reset, and real wages may take a hit until then," he said.

-Andrew Keshner

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 12, 2026 16:34 ET (20:34 GMT)

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