American workers are finding their take-home pay isn’t keeping up with inflation, with their wallets ‘stretched thinner and thinner’

For a second consecutive quarter, worker compensation is growing more slowly than inflation, meaning real—inflation-adjusted—take-home pay is shrinking. In practical terms, a paycheck that rises in nominal terms can still buy less than it did a quarter earlier when price growth outpaces wage growth. The pattern matters because it points to a squeeze on household purchasing power rather than a single one-off data point.

The market relevance runs through consumer spending, which is the largest driver of economic activity. If real pay keeps falling, households may fund spending by drawing down savings or borrowing, which is not sustainable indefinitely. That, in turn, feeds into expectations for retail sales, corporate earnings and, ultimately, how central bankers weigh the trade-off between taming inflation and supporting growth.

What to watch: whether the gap between compensation and prices narrows in coming quarters, and whether it does so through slower inflation, faster wage growth, or both. Also worth monitoring is whether households sustain spending by dipping into savings—a signal of resilience or of strain—and how that shows up in consumer credit data.