Inflation has beaten wage growth for four months. Plan your comp cycle around that, not the jobs print

Consumer sentiment in the University of Michigan survey remains worse than it was during the COVID period, even though the economy is still growing slowly, consumers are still spending, and both unemployment and layoffs are low ^[1][2]. The distance between those two facts has a measurable explanation that belongs in every compensation plan and demand forecast: inflation has exceeded wage growth for four straight months ^[3].

Joanne Hsu, who directs Michigan's surveys of consumers, said consumers' frustration over the erosion of their purchasing power continues to mount ^[4]. In August, almost three-quarters of consumers said they expected price growth to outpace their income growth over the next year ^[5]. Hsu said many people worry higher energy prices will affect other parts of the economy, and that a sustained drop in gasoline prices over several months, in contrast to temporary dips, would go a long way toward improving how consumers view the economy ^[6][7].

The expectation is the operative number. If most of your workforce walks into the review cycle assuming prices will beat their raise, a nominal increase that clears last year's budget guidance will still be received as a cut.

There is evidence that this is not a temporary mood. A working paper from Erik Hurst and Christina Patterson of the University of Chicago Booth School of Business, with Nela Richardson and Liv Wang of ADP Research, used ADP payroll data through 2025 and found that the unexpected, temporary inflation shock of the reopening produced a "persistent downward shift in real wages, helping explain why Americans' dissatisfaction outlasted the inflation episode itself" ^[8][9]. Real wages fell between December 2020 and 2024 for nearly 40% of workers, compared with roughly 24% before the pandemic ^[10], a widening of about 16 percentage points, or roughly 1.7 times the pre-pandemic share ^[11].

The mechanics are useful for anyone setting a merit budget. Richardson said a 3% raise was usually enough to deliver a modest real income gain before the pandemic, and that when inflation spiked in 2022, employers gave raises that did not keep pace ^[12][13]. The researchers found that bonuses did very little to stem workers' real wage losses, even though the average share of workers receiving a bonus rose in 2021 to 2023 relative to 2017 to 2019 ^[14]. Off-cycle raises, by contrast, helped moderate real wage declines for job stayers ^[15]. The one-time payment reads as generous and does not repair purchasing power; the base adjustment does.

On the demand side, ZipRecruiter economist Nicole Bachaud told Business Insider that even when people are making more money in nominal terms, rising prices leave less at the end of the month, and that this hits the middle- and low-income households who depend on wage growth to stay economically viable ^[16]. Mark Hamrick, chief economic analyst at The Hamrick Brief, said inflation persistently above the Federal Reserve's 2% target is contributing to pessimism and that Americans are paying the price through elevated price levels ^[17][18]. He said affordability challenges and a growing wealth divide end up disenfranchising a good number of people, and that sustained inflation-adjusted wage gains would mitigate that, which has not been happening in aggregate ^[19][20].

Watch whether the streak extends to a fifth and sixth month, and watch gasoline specifically, since Hsu has named a multi-month decline as the condition for sentiment to recover ^[3][7]. Watch labor force participation too: it is at its lowest level in decades outside the pandemic, which complicates reading low unemployment as strength ^[21].