Pay Raises Beat Inflation for First Time in 2 Years. Is the End in Sight?

What happened

Real average hourly earnings -- wages adjusted for inflation -- increased 1.2% year on year in June. The hourly wage in June 2023 was $11.05, up from $10.92 the year before. According to The Wall Street Journal, it's the second month running where inflation hasn't wiped out average wage gains.

So what

High living costs have put a big dent in people's budgets in the past few years. The news that real earnings are finally outpacing inflation could mean this pressure's starting to ease. Plus, per Bureau of Labor Statistics data, inflation is now at 3%. That's a long way down from the 9% it reached last June.

However, we're not out of the woods yet. The Federal Reserve is still treading a difficult tightrope. It wants to cool the economy enough to lower inflation, but not so much that we slide into a recession. In this respect, higher wages can be a double-edged sword. They help consumers handle spiraling inflation, but the fear is that they can also contribute to that inflation. Higher wages can push up the cost of doing business. If -- and when -- those costs get passed on to the consumer, prices go up even more. Wages, inflation, and interest rates are all connected.

Now what

If your wages have gone up, or your living costs have shrunk, you may be tempted to use that money to treat yourself. All the more so if you've had to cut back on non-essential spending to stay afloat. But if you can put any extra cash toward building financial resilience, it might make life easier further down the line.

For example, if you carry a balance on your credit card, focus on paying this down. Credit card interest can add up quickly and eat into your available funds. Depending on how much you owe, this debt can also increase your credit utilization ratio, which is the amount you owe vs. the total amount you're able to borrow on your cards. A high credit utilization can dent your credit score, making it harder to borrow money if you need it.

If you don't don't have enough money in a savings account to cover an emergency, perhaps you could put a small amount toward this each month. Many financial experts recommend having three to six months' worth of living expenses in an emergency fund. If this seems an unachievable goal, think about what would be feasible for you and try putting some money aside.

We've been hearing recession warnings for a long time. But some economists think the latest figures mean the U.S. could in fact avoid a severe economic downturn. Consumer confidence is increasing, earnings are growing faster than living costs, and inflation is slowing. Even so, given that things are still uncertain, using spare money to strengthen your finances makes sense.