Average hourly earnings for all employees on U.S. private nonfarm payrolls increased 3.2% in the year to July 2026, but consumer prices rose 3.4%. The U.S. Bureau of Labor Statistics calculated that real average hourly earnings fell 0.2% over the same period. Across the OECD, real wages were still below their early-2021 level in 13 of the 37 countries examined. A higher number on a paycheck does not always mean greater purchasing power.
The latest figures help explain an experience familiar to many workers. Their salaries have increased, sometimes more than once, but groceries, housing, energy and other expenses have also become more costly.
The money coming in may be higher. What that money can buy is another question.
A pay raise can still be a real pay cut
Economists distinguish between nominal wages and real wages.
A nominal wage is the amount of money an employee receives. A real wage adjusts that amount for changes in consumer prices, providing a better indication of purchasing power.
Suppose an employee earns $50,000 a year and receives a 4% pay raise. Their new salary is $52,000.
If prices rise by 5% over the same period, that $52,000 has the purchasing power of approximately $49,524 in the previous year’s dollars. The employee is earning more money but can buy roughly 1% less with it, before considering taxes or changes in household spending.
This is why a pay raise that appears respectable on paper may feel disappointing in practice. The relevant comparison is not simply with last year’s salary. It is with what has happened to the cost of living.
Lower inflation does not mean lower prices
Another source of confusion is the difference between falling inflation and falling prices.
If inflation declines from 8% to 3%, prices are generally still increasing. They are simply increasing more slowly. Economists call this disinflation.
Consider an item that originally costs $100. After an 8% increase, it costs $108. If inflation then falls to 3%, its price does not return toward $100. Assuming it follows those inflation rates exactly, it rises again to $111.24.
For the price to fall, there would need to be deflation in that particular item or across the economy. A lower positive inflation rate does not reverse earlier increases.
This explains why policymakers can correctly report that inflation has fallen while households continue to complain about high prices. The rate of increase may have declined substantially, but the price level remains higher than it was before the inflation surge.
The wage recovery is real, but incomplete
There has been progress in many countries.
The OECD Employment Outlook 2026 found that annual real wage growth was positive in virtually all the countries for which data were available in the first quarter of 2026.
Average real wage growth across 37 countries was 2.2%. However, that was slower than the 2.7% recorded a year earlier, and growth had weakened in two-thirds of the countries examined.
Recent improvement has also not repaired all the purchasing power lost during the inflation shock.
Real wages remained below their first-quarter 2021 level in 13 of the 37 countries. They were more than 2% below that level in Australia, Czechia, Denmark, Italy, New Zealand and Sweden.
The OECD said real wages had regained some of the lost ground in virtually all the countries studied. The important distinction is between recovering and having fully recovered.
The United States shows how narrow the margin can become.
The Consumer Price Index increased 0.1% in July 2026 and was 3.4% higher than a year earlier. Food prices increased 3.0% over the year, while shelter costs rose 3.2%.
Energy prices fell 1.5% during July but remained 14.7% above their level a year earlier. Gasoline was 24.6% more expensive than in July 2025.
Meanwhile, average hourly earnings increased 3.2% over the year.
After adjusting for inflation, the BLS found that real average hourly earnings fell 0.2% between July 2025 and July 2026.
Real average weekly earnings performed slightly better, increasing 0.1%. That was partly because the average workweek was 0.3% longer.
A worker can therefore receive more purchasing power each week because they are working more hours, even while the real value of each hour of work declines.
Your household may face a different inflation rate
The official inflation rate measures average price changes across a representative basket of goods and services. No individual household buys that exact basket in those exact proportions.
A renter who spends a large share of income on housing may experience inflation differently from a mortgage-free homeowner. A family with high childcare costs has a different budget from a retired couple. Someone who drives long distances to work will notice gasoline prices more than someone who works from home.
The BLS acknowledges that the Consumer Price Index may not perfectly reflect an individual’s experience because it is based on the buying habits of an average consumer.
ECB President Christine Lagarde made a similar point in a February 2026 speech to the European Parliament.
She explained that people interpret inflation through their own consumption patterns and experiences. Frequently purchased items tend to carry more weight in people’s perceptions than goods and services they buy only occasionally.
This is one reason food and fuel prices matter so much to public opinion. Consumers see them repeatedly, often several times a week.
An official inflation rate can therefore be an accurate measure of average price movements across an economy while remaining a poor description of the financial pressure facing a particular household.
Research also indicates that recent experiences influence expectations about what will happen next.
A June 2026 Federal Reserve staff working paper, based on euro-area household surveys, found that perceptions of recent price changes played an important part in the formation of inflation expectations.
Another Federal Reserve staff paper published in May found that shifting attention toward unfavorable economic news increased bias in household inflation forecasts, while attention to favorable news reduced it.
Both papers are preliminary staff research and do not represent official conclusions of the Federal Reserve Board. They indicate that people’s economic experiences are neither purely statistical nor purely psychological. Actual spending patterns, recent price changes and the information people notice can interact.
Measuring real pay depends on the yardstick
Even the calculation of real wages depends on what is being measured.
A 2026 Pew Research Center analysis examined median weekly earnings among employed U.S. wage and salary workers.
Median weekly earnings increased from $482 in December 1999 to $1,040 in December 2025. In nominal terms, they more than doubled.
After inflation was taken into account, the increase in buying power was much smaller. Pew calculated a real gain ranging from 11.5% to 22.1%, depending on the price index used. Using the main Consumer Price Index for All Urban Consumers, the increase was 12.1%.
The estimates differed because the indexes use different formulas, coverage and assumptions about changes in consumer behavior.
The time period also changed the answer. Pew found that median wages outpaced all four inflation measures during the 10 years ending in December 2025. During the five years ending in December 2025, real wages fell under all four measures.
That does not mean one calculation is necessarily correct and the others are wrong. Different measures answer slightly different questions.
It does mean that statements about whether workers are better off need context. The answer depends on the group of workers, whether average or median earnings are used, the inflation measure selected and the starting date.
Why the squeeze matters to employers and customers
The persistence of cost-of-living concerns can be seen in household surveys.
The Federal Reserve’s Economic Well-Being of U.S. Households in 2025 report found that 73% of adults were either doing okay financially or living comfortably. That share was unchanged from the previous year.
At the same time, 91% described price increases as either a minor or major concern. Price increases remained the most commonly reported financial concern in the survey.
Those findings are not contradictory. A household can continue paying its bills while saving less, reducing discretionary spending or becoming more careful about everyday purchases.
For businesses, customers who feel squeezed may become more price-sensitive, postpone large purchases, switch to cheaper alternatives or reconsider recurring expenses. Nominal wage growth does not necessarily produce the spending confidence that companies might expect.
Employers face a similar issue.
A company may award a 4% pay raise and regard it as generous. Employees will compare that increase with what has happened to rent, food, transportation, energy and other expenses, particularly over several years rather than one.
If prices previously rose much faster than salaries, a current pay raise may be repairing an earlier loss rather than creating a new gain. This can affect wage negotiations, morale, recruitment and retention even when payroll costs are rising.
The useful comparison is therefore not simply between this year’s pay raise and this year’s inflation rate. It is between the cumulative growth in earnings and the cumulative increase in living costs since the inflation shock began.
A worker can be moving in the right direction and still not be back where they started.
