Friday’s release of monthly labor data is expected to show that average hourly earnings in July increased by 3.5% relative to this time last year—which is in line with the 3.5% increase in the employment cost index (ECI) in the second quarter.
However, the ECI includes both wages and benefits, which offers a more complete look at the cost of labor for U.S. employers.
Although core inflation looks a bit more benign than topline inflation, we expect July’s data to reflect flat growth in real wages. This suggests that a substantial slowing of inflation in the latter half of this year would be required to quell the growing unrest around the cost of living and what can effectively be described as an affordability crisis following the pandemic-era shock.
The ECI peaked in 2022, which coincided with the post-pandemic peaks in inflation and wage growth. The increases in wages and benefits were a product of the extremely tight labor conditions of the COVID-19 era as employers needed to raise wages to counter the prevailing sentiment of workers opting out of the traditional labor force.
More recently, the ECI flattened out at a 3.4% yearly growth rate while its wage component continued to drift lower to a 3.1% yearly rate in the second quarter of 2026.
It’s here where the economy and policymakers come to terms with the affordability issue. As wages drift lower, inflation has spiked; this is a byproduct of the effects of tariffs since April 2025 and, more recently, the ongoing energy shock of 2026.
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The pandemic experience suggests the need for business leaders to maintain the employment of their top staff. Conversely, the implementation of productivity measures during the pandemic offers a stark reminder to employees of what has become a more-competitive labor market—particularly amid the proliferation of AI tools.
There are other factors at play for both employers and those in the workforce in terms of the supply and demand for labor, which will affect the offering and demand for wages and benefits.
For employers, wages are sticky, especially on the way down. At the same time, people in the workforce are contending with inflated consumer prices and may be less likely to accept wages that do not cover the long-term effects of the energy shock on essential products.
Additionally, the U.S. population is aging and immigration is unlikely to keep up with replacing lost workers. This implies a tightening of the labor supply that would ordinarily promote wage gains—an issue we think will contribute to the growing sense that inflation is going to be higher for longer.
The takeaway
It is as unrealistic to expect productivity investments to instantly reduce the need for labor as it is for members of the workforce to accept lower wages during an inflation shock.
It seems more realistic for industries to recognize the lack of immigration as a reason to continue productivity advances—and to recognize the need for higher wages to attract a sufficient and competent labor force.
These considerations should be top of mind for central bankers, alongside their ongoing focus on topline monthly gains and the U.S. unemployment rate.
