New research from the Federal Reserve shows that American consumers' expectations for future wage growth remained remarkably stable despite massive fluctuations in both inflation and actual wages during the pandemic era.
Analyzing data from the New York Fed's Survey of Consumer Expectations and the University of Michigan Surveys of Consumers, researchers Corinne Salter and Daniel Villar found a disconnect between economic reality and consumer sentiment.
While price inflation and actual wage growth experienced significant volatility between 2021 and 2024, expectations regarding future pay showed very little discernible movement.
A disconnect in expectations
The study highlights a divergence in how consumers process different economic indicators. While inflation expectations rose substantially alongside rising prices before gradually receding, wage expectations did not follow a similar trajectory.
This lack of movement in wage expectations suggests that workers may not be adjusting their future income projections in the same way they adjust their views on the cost of living.
Federal Reserve researchers noted that this pattern is particularly striking given the high-inflation and high-wage-growth period seen recently. The findings suggest that wage expectations tend to underreact to economic shifts compared to inflation expectations.
Understanding this gap is critical for monetary policy. The Fed relies on the link between inflation expectations and wages to predict how inflation will behave in the long term.
If workers do not adjust their wage demands based on rising prices, the pressure on inflation may be lower than traditional models suggest. Conversely, the study notes that higher inflation expectations can still drive workers to seek new jobs to protect real income, even if their baseline expectations for growth remain static.