The rise in inflation as a result of significant supply chain issues and aggressive fiscal policy to offset the pandemic closures has caused the Federal Reserve to increase interest rates sharply to quell the rate of increase in prices. 

This has, obviously, had far-ranging consequences.

For families, inflation is a tax on earnings as their dollars are only able to buy a portion of the goods and services they are accustomed to purchasing. 

This is, however, only true if wage growth is below the rate of inflation. In other words, people care what happens to their real wages – which are nominal wages adjusted for inflation – as that is what determines changes to their purchasing power and therefore is the metric that matters. 

During previous episodes of high inflation, workers’ wages rarely kept up. 

This time, however, what we saw was a different story as wages increased by a significant rate, especially in sectors that were experiencing labor shortages. 

To lure workers back from the sidelines, employers had to offer higher wages, which in many sectors increased by more than inflation. There is, however, significant variation across sectors and regions. 

In North Carolina, average hourly wages as of November 2023 were 21% higher than the same month in 2019. During that same time span, prices were 20% higher. 

This means, on average, North Carolina workers’ wages kept up with inflation, and people’s purchasing power was constant, which partially helps explain the strong consumer spending trends we have witnessed. 

People were able to continue spending even when most economic observers were calling for an economic recession because their wages were allowing them to absorb the inflationary pressure. There is, however, considerable heterogeneity with leisure and hospitality wages increasing by 28% while the financial sector’s wages only increased by 12%.  

In the Wilmington metropolitan area, average hourly wages have increased by 41% between November 2019 and November 2023, which is more than any other metro in the state. 

This points to the growth of the area and the changing composition of jobs but also to the shortages of workers that the region experienced post-COVID.

It is important to note that these wage increases were not evenly distributed and accrued largely to job switchers and workers in lower-wage occupations.

The recent inflation reports indicate that the Federal Reserve’s fight might not be won yet as price increases reaccelerated. 

As a result, there are significant questions about whether the rise in wages in a post-pandemic world can keep up with inflation. Many of the worker shortages have been resolved and people’s ability to continue spending will partially depend on whether their wages can keep up with inflation.

One of the important questions going forward is whether the economy can continue surprising to the upside. The answer to that question will rest on the inflation path and that of wages. 

At the local level, lower-wage workers employed in leisure and hospitality have been partially sheltered from the pinch of inflation, but there is uncertainty about whether the strong wage growth can continue into the next year.

Mouhcine Guettabi is a regional economist with UNCW’s Swain Center and an associate professor of economics at UNCW’s Cameron School of Business.