The best way to fix Americans’ cost-of-living problem is to give workers bigger raises, Federal Reserve Chair Jerome Powell said last week.
The problem: That solution looks broken, too. The US job market has been stagnant in recent months, and paycheck growth has been falling steadily for more than three years. We’ll get a clearer picture Tuesday when the Bureau of Labor Statistics publishes the delayed October and November jobs reports.
Affordability has remained issue No. 1 in poll after poll, despite more than a year of relatively normal inflation and over two years of wage growth outpacing price hikes. That’s because Americans haven’t yet adjusted to the price shock from a few years ago, when inflation surged to a four-decade high.
Economists, business leaders and politicians have debated the best solution to make America’s cost-of-living feel affordable again, including increasing health care and housing subsidies and reducing tariffs. But Powell, in laying out the reasons for the Fed’s recent interest rate cuts, offered a much simpler solution: Just pay people more money.
“We are going to need to have some years where real compensation is higher … for people to start feeling good about the affordability issue,” Powell said last week at a press conference after the Fed cut rates. “We are trying to keep inflation under control, but also support the labor market and strong wages, so that people are earning enough money and feeling economically healthy again.”
The Fed hopes that by reducing interest rates, businesses will spend less to borrow money, freeing up more capital to spend on hiring. A better labor market would give Americans more choices in jobs, increasing the amount of pay companies would need to shell out to keep and attract workers.
If that keeps up, then over time, people will adjust to the higher prices, which will feel relatively affordable as their paychecks grow, Powell argued.
Of course, that’s easier said than done.
The annual growth in American workers’ hourly pay, which topped out at 5.9% in March 2022, has since fallen to just 3.8%. That trend is, in part, a result of inflation coming back down to earth and employers giving workers smaller cost-of-living adjustments.
But it’s also a result of a tightening job market. Job growth has come to a near standstill, with overall hiring falling in both June and August. The US economy has added an average of just 76,000 jobs per month in 2025, barely enough to support America’s population growth and less than half the average the US economy was adding in 2024.
The post-pandemic take-this-job-and-shove-it, quiet-quitting era where workers had the upper hand over employers is officially over. People with jobs are staying put, even if they’re unhappy: The rate of workers who voluntarily quit their jobs fell to a five-year low in October, the Bureau of Labor Statistics reported last week.
If employers aren’t losing workers, there’s less incentive to give them big raises to stick around.
The good news: Employers suddenly seem somewhat more willing to hire. Job openings rose to a five-month high in October, and a three-year-high 19% of small businesses plan to hire in November, according to last week’s National Federation of Independent Business’ small business optimism survey.
The bad news: Tariffs continued to threaten businesses’ bottom lines and prices. Although companies have eaten roughly 80% of President Donald Trump’s new tariffs thus far, their profit margins are shrinking, and they’ll begin passing much of those costs on to consumers in the form of higher prices next year, according to JPMorgan.
So, if the job market heats up again, paychecks may get a boost, too. But if inflation continues to rise, higher wages will get consumed by higher prices. The affordability problem won’t get solved that way.
Concerns about rising inflation are why the Fed signaled that its rate-cutting campaign may be over for quite some time. Although rate changes can take months to work their way through the economy, pausing the cuts means the labor market may not get the support it could need.
If the US economy is going to pull out of its affordability mess, recent trends will have to reverse themselves. We’ll get a clearer picture this week, when the Bureau of Labor Statistics reports on jobs Tuesday and inflation on Thursday.
Don’t expect any quick fixes.
Reposted from CNN
