Paychecks Lose Ground to Inflation Again as Wage Growth Slows to 2021 Low
American workers’ pay fell further behind rising prices in the third quarter, with inflation-adjusted wages and salaries down 0.6% over the past year, the government reported Friday.
The Employment Cost Index from the Bureau of Labor Statistics showed wages and salaries rose 3.1% in the 12 months through September, down from 3.2% in the year through June.
That is the slowest annual wage gain since early 2021, according to TheStreet. Total compensation costs rose 0.8% in the quarter, in line with forecasts and down from 0.9% in the spring.
Prices are running hotter than paychecks. The Personal Consumption Expenditures price index rose 3.6% from a year earlier in September, Reuters reported, driven largely by the U.S.-Israeli war with Iran.
Real wages had already slipped 0.3% in the year through June. The new reading marks the second straight quarter in which inflation-adjusted pay has shrunk.
“Paychecks are barely able to keep workers’ heads above water, trying to scratch out a living,” said Christopher Rupkey, chief economist at FWDBONDS. “Bringing home a real paycheck that matches inflation is next to impossible for most Americans.”
Health Costs Eat Into Raises
Benefits are taking a bigger share of what employers spend. Benefit costs rose 3.9% over the year, the fastest pace in three years, and private-sector health benefits jumped 6.4%.
That health figure matches a 20-year high set in late 2025, Haver Analytics noted. Rising benefit costs mean employers have less room for raises.
“Health insurance costs are running at their fastest clip since 2005,” said Matthew Martin of Oxford Economics. He said the shift toward benefits “slows growth in take-home pay.”
The slowdown was broad. Private-sector wages grew 0.8% in the quarter, while state and local government wages rose 0.6%. Union workers saw 4.3% annual wage growth, compared with 3% for nonunion workers.
Leisure and hospitality wages rose just 2.2% over the year, the weakest since 2016, and manufacturing wage growth slowed to its lowest since 2021.
Annual compensation growth has held at 3.4% for four straight quarters. That kind of stability is highly unusual, occurring just 2% of the time since the index began in 1982, according to Haver.
Hiring has been lackluster this year, which accounts for some of the cooling in raises, though layoffs remain historically low and the job market has been mostly stable.
For the Federal Reserve, cooler wages are a modest relief. The central bank held its benchmark rate at 3.75% to 4% on Wednesday while saying inflation “remains elevated,” and economists expect a hike in December.
“While consumer inflation remains elevated, the Fed will take some comfort from the fact that the labor market is no longer a significant source of price pressures,” said Priscilla Thiagamoorthy, a senior economist at BMO Capital Markets.
Economists told Reuters that falling real pay reflects a cost-of-living squeeze that is weighing on consumer confidence and on President Donald Trump’s approval rating ahead of Tuesday’s midterm elections.
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