American workers saw their wages climb faster than at any time since the mid-1980s. But inflation rose so quickly that workers actually took a pay cut instead.
Every time inflation rises, it eats into workers’ wages and eats away at their bank accounts. And this current wave of inflation – triggered by a confluence of events including the war in Ukraine and the ongoing pandemic – has had a voracious appetite.
This means wage increases have actually turned into losses, with the latest inflation report showing consumer prices rose 8.6% for the year ending May. As a result, the average consumer must pay about $460 more each month than this time last year to pay for the same goods and services, according to Moody’s Analytics. Additionally, research from the University of Michigan found that real disposable income per capita is on track to post the biggest annual decline since 1932.
Worse still for American workers, the Federal Reserve has embarked on a rate-hike campaign aimed not only at reining in inflation, but also wage growth.
“When the Fed meets and makes its policy decision, most people don’t understand that what the Fed is saying is ‘you’re making too much money, your wages are rising too fast, and we need to slow the demand for labor. work, and we need to slow wage increases,” said William Spriggs, professor of economics at Howard University in Washington, DC, and chief economist of the AFL-CIO union.
But wage growth is not, to any significant degree, driving inflation, said Mark Zandi, chief economist at Moody’s Analytics.
“Causality runs from inflation to wages, not from wages to inflation,” he said.
Instead, the main drivers of today’s price increases are actually a series of extreme supply shocks, including global supply chain failures and the war in Ukraine, Spriggs said.
“You can’t just remove major wheat production, major edible oil production, major fertilizer production, major oil production, major natural gas production, major [semiconductor] chips used in automobiles and think you’re not going to have inflation,” he said. “When this is featured in the US news, you get this idea that if our stimulus checks had been lower and our wages had gone down, we wouldn’t have this inflation. No one in the world accepts this point of view.
America may not technically be in a recession – but for many people it is certainly starting to be.
“When you start looking at this data, you start to think that the people who are really in distress might be right; that the situation is far more dire economically than the data economists normally look at,” said Donald Grimes, a University of Michigan economist who has conducted research on real-world trends in after-tax income.
Nominal wages for full-time workers rose an average of about 5% in the 12 months ending May 2022, according to the Federal Reserve Bank of Atlanta’s Wage Growth Tracker. The tight labor market, a renewed movement to strengthen workers’ rights, and efforts by states and some large employers to raise the minimum wage have all contributed to significant wage growth over the past year.
Adjusting for inflation, however, real wages are hovering minus 3.5% over the same period, and they’re down across the vast majority of industries, according to a CNN Business analysis of Bureau of Labor data. United States Statistics.
“In terms of actual purchasing power, a lot of the gain is basically getting the rug pulled out from under you,” said Conference Board senior economist Erik Lundh.
Real disposable income levels are about where they were before the pandemic, Grimes said. However, they don’t behave like they normally do, which would be to grow at a rate of 2 to 3% per year. Instead, they are on track to fall 5.6%, he said.
The sharp drop is partly due to inflation, but also to the end federal pandemic assistance.
“For people who saved some of that money to support expenses, life is probably still pretty good,” he said. “But for people living paycheck to paycheck, this decline in real disposable income…it’s a lot more painful than economists and policymakers think.”
The Fed is indeed in a precarious position. While it raises rates to tame inflation, it must try not to plunge the economy into a recession.
The Fed committee said in its statement on Wednesday that it was “strongly committed to bringing inflation back to its 2% target,” indicating that more aggressive hikes are not ruled out.
The Fed also said it does not expect inflation to decline this year and sees unemployment rising to 3.7% in 2022, higher than its March forecast.
“I think they have a chance to land the economy plane on the tarmac without crashing it,” Zandi said. “We need some luck on the pandemic and on the fallout from the Russian invasion.”
High inflation and general economic volatility have also sparked fears among some economists and policymakers that wages and prices would engage in a foot race, creating a 1970s-style price-wage spiral environment where inflation soars even higher.
However, a return to the stagflationary environment of the 1970s is a bit premature, said Lundh.
“It’s the kind of environment that’s been going on for years,” he said. “We can see a degree of stagflation, later in 2022 and 2023 in terms of growth rates really collapsing well below potential and inflation staying well above target, but I don’t think not necessarily that it will be at the same level or the same duration as what we saw in the 1970s.”
The strength of Americans’ balance sheets and tax returns are helping to ease concerns, said Tim Mahedy, senior economist at KPMG.
People have a cushion of savings from federal spending programs during the pandemic, he said, noting that while revolving credit as a share of personal income is up from last year, levels remain healthy.
“We can’t keep doing what we’re doing, but consumers have time for inflation to hopefully come down,” he said, pointing out that the inflation numbers and shares of the Fed over the next few months will prove critical.
If inflation doesn’t start to cool within the next two months, consumers will begin to feel more pain, he said.
“We have buffer and time, but we are running out.”