US Pay Trails Inflation Again as Health Costs Squeeze Paychecks
Wages lagged inflation for a second straight quarter, federal data showed, as employers' health costs climbed and pay gains slowed.
American workers lost more ground to inflation over the past year, new government data show. Wages and salaries rose 3.1% in the 12 months through September, but after adjusting for rising prices they fell 0.6%, the Bureau of Labor Statistics said Friday. It was the second straight quarter in which pay failed to keep up with the cost of living, while a sharp rise in health insurance costs absorbed a growing share of what employers spend on their workers.
What the report showed
The figures come from the Employment Cost Index, a quarterly survey that tracks what employers pay for wages and benefits. Because it follows the same mix of jobs over time, it is not distorted when workers shift between higher- and lower-paying roles.
Total compensation for civilian workers rose 0.8% in the three months through September, the bureau said, slightly slower than the 0.9% gain in the second quarter. Reuters reported that the increase matched economists’ expectations. Within that total, wages and salaries rose 0.7%, down from 0.9%, while benefit costs rose 0.9%, down from 1.0%.
Over 12 months, the picture splits in two:
- Total compensation rose 3.4%, the same pace as in the year through June.
- Wages and salaries rose 3.1%, down from 3.2%.
- Benefit costs rose 3.9%, up from 3.8%.
- Health benefit costs for private industry workers rose 6.4%, up from 6.0%.
Why it matters for households
The inflation-adjusted decline in wages deepened from 0.3% in the year through June. Haver Analytics, an economic data firm, said the 0.6% drop was the weakest reading since the first quarter of 2012. When benefits are included, inflation-adjusted compensation fell a smaller 0.4%, the bureau’s figures show, because benefit costs grew faster than wages.
That gap is the central tension in the report. Rising benefit costs count as compensation for employers, but workers do not see that money in their paychecks. Matthew Martin, senior U.S. economist at Oxford Economics, told Reuters that health insurance costs were “running at their fastest clip since 2005.” He said a shift toward higher benefit growth and lower wage growth slows the growth of take-home pay.
Indeed Hiring Lab, the research arm of the job site Indeed, reported that average monthly premiums rose 8.5% to $174 for single coverage and 7.6% to $730 for family coverage, which it called the largest annual increases since 2010. It said employers’ share of premiums held steady, suggesting the increases reflect costlier plans rather than a larger burden shifted onto workers.
Pay gains were also uneven. In private industry, union workers’ wages rose 4.3% over the year, compared with 3.0% for nonunion workers, according to the bureau.
A mixed signal for the Federal Reserve
Economists read the report in different ways. Priscilla Thiagamoorthy, senior economist at BMO Capital Markets, told Reuters that the Fed would take some comfort that the labor market “is no longer a significant source of price pressures.” Christopher Rupkey, chief economist at FWDBONDS, a financial research firm, offered a bleaker view, telling Reuters that paychecks “are barely able to keep workers’ heads above water.”
The Federal Reserve left its benchmark interest rate in a range of 3.75% to 4.00% on Wednesday and said inflation remains elevated. Reuters reported that economists expect the central bank to raise rates in December. The personal consumption expenditures price index, the inflation measure the Fed targets, rose 3.6% in the year through September, and 3.1% excluding food and energy, according to the same report.
Reuters attributed the price pressures mostly to the U.S.-Israeli war with Iran, which has raised the cost of energy and fertilizer, along with a boom in artificial intelligence investment. It described the labor market as mostly stable, with historically low layoffs but lackluster hiring that has helped slow wage gains. Economists told the news agency the data underscored a cost-of-living squeeze that is weighing on consumer sentiment and on President Donald Trump’s approval rating.
What comes next
The bureau is scheduled to publish the next Employment Cost Index report, covering the final three months of the year, on Jan. 29, 2027. By then, economists will be watching whether the expected December rate increase materializes and whether wages begin to catch up with prices. With the war ongoing and inflation still elevated, the outlook for what workers’ paychecks can buy remains uncertain.
