While in most major advanced economies the year-on-year growth in nominal wages has been back above inflation for a few months now, we can ask ourselves where households’ purchasing power stands compared to its pre-inflationary crisis level. This purchasing power can be measured in two ways: in the broad sense and more accurately, when it is calculated on the basis of the real gross disposable income (GDI) of households; and in a narrower sense, but perhaps more meaningful for households, when it is assessed on the basis of real wages[1].
Has households’ purchasing power returned to its pre-inflation level?
Since Q4 2020 (the reference date chosen because it marks the trough of inflation before the first signs of its surge in early 2021), gains in GDI purchasing power, of varying magnitude, have been recorded in all the countries analysed, with the exception of Japan. In contrast, the cumulative increase in nominal wages remains below that of the consumer price index (CPI) in all countries. It should be noted that the difference in cumulative evolution between the consumption deflator and the CPI is, in fact, not very large, and is always the same sign (except in Japan).
The difference in cumulative changes between nominal GDI and nominal wages is instructive: despite the significant gains in purchasing power of GDI that result from this, the losses in terms of real wages are attracting more attention and probably contribute to the negative feeling of households, at least in Europe. They also contribute to the sluggishness of their consumption, and therefore, to their abnormally high savings rate compared to 2019, in contrast to the American situation. Much also depends on the components of the GDI that have supported its progress. In France, for example, in 2023 and 2024, it was for a part fuelled by financial income, which is saved rather than consumed. It has also been fuelled by the dynamics of social benefits, which have been revalued in line with inflation, but this increase has not been consummated as we might have expected. In the United States, the more direct nature of emergency income support measures during the Covid crisis may have played a more favourable role.
What does this bode for consumption?
The continued slowdown in inflation expected in the euro area throughout 2025, combined with a still relatively dynamic growth in nominal wages (although less than in 2024), should allow the cumulative evolution of real wages to be less negative, or even to tip into positive territory. However, the positive effects of these purchasing power gains on household consumption are not certain in all countries, insofar as the likely rise in unemployment rates and future budgetary developments could act as counterweights, particularly in France. The situation looks different in Japan and the United States, where inflation is expected to rise gradually over the course of 2025. The latter would erode nominal wage gains, probably more clearly in the United States, where their momentum is downward, than in Japan, where they are still accelerating.
