Strong wage growth gave Americans a $1,000 spending boost in 2023
Treasury Department report finds that wages grew faster than consumer prices
Americans had more money to spend in 2023, a new US Treasury report shows.
US real wages — wages adjusted for inflation — have risen 0.8% over the last 12 months, according to the Treasury Department's recent research "The Purchasing Power of American Households." The growth is 0.2% percentage points higher than the average annual real wage growth in the 10 years before the pandemic.
That income growth brought along increasing consumer purchasing power. In 2023, the median American worker can afford the same goods and services they did in 2019 — and still would have $1,000 left.
Thanks to a strong labor market, US household income is rising faster than consumer products and service prices, the report says. Workers are benefiting from pay raises that outpaced inflation, and they can buy or save more in return.
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"Although wage growth has moderated some, it remains healthy and inflation has come down and now real earnings are going up," Treasury Secretary Janet Yellen said to CNBC. "So gradually over time I think people will feel better about the economy."
The $1,000 boost
The uprise gives American workers $1,000 more on average to save or spend in 2023 compared to 2019.
The Treasury used the cost of a “consumption bundle” – a mixture of everyday goods and services – to determine the change in the share of household spending over the last few years and found that while the price growth of some household items outpaced wages, many others did not – resulting in households spending 1.7% less of their salary on those everyday items.
Yellen pointed to the example of eggs, whose prices soared during the pandemic. "We saw egg prices utterly skyrocket, mainly because of the avian flu. They've come down back towards pre-pandemic levels,” she said.
Spending categories such as education and communication, medical care, recreation, apparel, and housing took up less share of income in 2023 when compared to 2019, suggesting that prices for these items grew slower than incomes.
However, transportation and food and beverage are much more expensive now, requiring buyers to spend a higher percentage of their income in that same period.
The Treasury attributed the increasing purchasing power to a robust labor economy. Not only are American workers earning more, but there are more workers than previously forecasted, the report explained.
The US economy now has 2.2 million more jobs than the Congressional Budget Office (CBO) forecasted in 2020 for Q3 2023. The prime-age employment-to-population ratio has recently reached a more than 20-year high, meaning more workers are participating and benefitting in today's high-wage environment.
What has gotten more expensive, and what hasn't?
Within the “consumption bundle,” prices for necessary and frequently used goods rose faster than relatively less essential goods, according to the Treasury report.
"Americans are certainly feeling the bite of higher gas and food prices, which were hit hard by Russia's brutal war in Ukraine," the report says. But that is changing.
"I think we're in a path, and gas prices are way down," Yellen said. "There are a number of states where a gallon is running at under $3 a gallon, which is great news for consumers."
Rent, restaurant meals, and personal care still dominated the inflation chart as they grew 6.9%, 5.3%, and 5.2%, respectively year-over-year in November, overshadowing the overall CPI price rise of 3.1% last month.
However, Americans found comfort in the prices of other items that either declined or rose slower than income in 2023. The prices for clothes, prescription drugs, internet service, hotels, and motels, and admission tickets grew less than median earnings, while the prices for televisions, health insurance, personal computers, airline fares, and toys declined in 2023 from 2019, the report shows.
"Consumers are beginning to understand that inflation is coming down," Yellen added.
Rebecca Chen is a reporter for Yahoo Finance and previously worked as an investment tax certified public accountant (CPA).
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