Are Salaries Keeping Up With Inflation?

It’s a sentiment you’ve likely noticed just about everywhere: As inflation increases the cost of living, people begin to worry that their paychecks aren’t going far enough. But what’s the real relationship between salaries and inflation — and what does that mean for your wallet?

Let’s take a closer look.

Salaries and inflation: A brief history

The story of salaries and inflation begins with the Employment Cost Index (ECI), which is informed by data from the National Compensation
Survey and the Consumer Price Index (CPI). The ECI describes employers’ hourly labor costs, including benefits, and how these change over time. Because it only measures certain occupations and isn’t influenced by changes in labor force composition, the ECI is considered a “true measure of wage inflation.”

Since its first publication in the 1970s, this index has shown an interesting relationship between salaries and inflation. For example, between 2005 and 2013, wages essentially kept up with inflation. Starting in late 2014, wages began to outpace inflation and didn’t slow down: Wages for private industry workers were 7.3% higher in 2021 than in 2005.

However, things changed in mid-2021. The CPI trended upward and gradually closed the gap. In April 2021, inflation was at 4.2% while wage growth was at only 3.2%; essentially, inflation outpaced wages. In fact, the monthly inflation rate hit a 40-year high in mid-2022, reaching 9.2%. By this same time, wages for private industry workers were only 3.8% higher than in 2005 — and 3.3% lower than in 2021.

The salary landscape in 2023

Between 2022 and 2023, compensation costs for private employees increased 5.1%. However, when adjusted for inflation, that increase is only 0.1% — and benefit costs actually declined by 0.6%.

What does that mean for real-world employees? Simply put, workers are worried. 80% say their salaries aren’t keeping up with inflation. To make things more complicated, about two-thirds of survey respondents said they were either extremely or somewhat concerned about job security — and only 35% felt extremely confident in their chance of finding a different position. 

Meanwhile, 50% of surveyed employers said they expect their salary increase budgets to be higher this year than in 2022. Most respondents (85%) cited labor shortages and tougher competition as the reason behind this growth, but nearly a third also mentioned a larger-scale change in compensation philosophies.

Takeaways for tomorrow

As inflation rates continue to shift and the workforce is consistently impacted by global factors, there’s no way to say for sure what will happen to your salary. However, if you’re one of many people who feel your paycheck isn’t keeping up with the higher cost of living, you may want to consider solutions like these:

• 47% of surveyed workers are looking for higher-paying jobs.
• 45% are following stricter budgets.
• 31% are taking side jobs.
• 23% are increasing their savings.

Need help planning for an uncertain financial future? Reach out to a Vectra Bank professional to get started today.