American workers’ wages have risen at an all-time high since the mid-1980s. But inflation has risen so fast that workers have instead been awarded a pay cut.
Every time inflation rises, it takes a bite out of workers’ wages and gnaws 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 an insatiable appetite.
This has resulted in wage increases actually turning into losses, with the latest inflation report showing consumer prices up 8.6% for the year ended May. As a result, the average consumer has to spend an estimated $460 more each month than at this time last year to pay for the same goods and services, according to Moody’s Analytics. In addition, research from the University of Michigan found that per capita real disposable income is on track for the largest annual decline since 1932.
To make matters worse for US workers, the Federal Reserve has launched a rate hike campaign aimed not only at curbing inflation but also wage growth.
“When the Fed meets and makes its policy decisions, most people don’t understand what the Fed is saying, ‘You’re making too much money, your wages are growing too fast, and we need to curb labor demand, and we need to slow wage increases ‘” said William Spriggs, an economics professor at Howard University in Washington, DC, and chief economist for the AFL-CIO union.
But wage growth isn’t driving inflation significantly, said Mark Zandi, chief economist at Moody’s Analytics.
“The causality is 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 outages in the global supply chain and the war in Ukraine, Spriggs said.
“You can’t just remove the big wheat production, the big cooking oil production, the big fertilizer production, the big oil production, the big natural gas production, the big production of oil [semiconductor] Chips that are used in cars and think you’re not going to get inflation,” he said. “When it’s presented on the American news, you get the idea that if our stimulus checks had been lower and our wages had been lower, we wouldn’t have this inflation. Nobody in the world accepts that as a point of view.”
America may not technically be in a recession — but it’s beginning to feel like it for many people.
“When you start looking at this data, you start thinking that maybe the people who are really desperate are right; that the situation is economically much worse than the data economists normally look at,” said Donald Grimes, a University of Michigan economist who has conducted research on real after-tax income trends.
According to the Federal Reserve Bank of Atlanta’s Wage Growth Tracker, nominal wages for full-time employees increased by an average of about 5% in the 12 months ended May 2022. A tight labor market, a renewed movement to strengthen workers’ rights, and efforts by states and some large employers to raise minimum wages have contributed to significant wage growth over the past year.
Adjusted for inflation, however, real wages are down 3.5% over the same period and have fallen in the vast majority of industries, according to a CNN Business analysis of data from the US Bureau of Labor Statistics.
“In terms of real purchasing power, a lot of the gains are basically getting the rug pulled out from under them,” said Erik Lundh, chief economist at The Conference Board.
Real disposable income levels are about what they were before the pandemic, Grimes said. However, they don’t behave the way they normally do, which is to grow at a rate of 2% to 3% per year. Instead, they’re on track to fall 5.6%, he said.
The sharp descent is partly due to inflation, but also the end the federal pandemic aid.
“For the people who saved some of that money to cover their expenses, life is probably still pretty good,” he said. “But for people living paycheck to paycheck, this decline in real disposable income is … much more troubling than economists and politicians realize.”
The Fed is indeed in a precarious position. While raising interest rates to tame inflation, it must try not to plunge the economy into recession.
On Wednesday, the Fed’s committee said in its statement that it was “firmly committed to returning inflation to its 2% target,” suggesting more aggressive rate hikes are not off the table.
The Fed also said it doesn’t expect inflation to ease this year and sees unemployment rising to 3.7% in 2022, higher than its March forecast.
“I think they have a good chance of landing the economy plane on the tarmac without crashing it,” Zandi said. “We need a bit of luck with the pandemic and the aftermath of the Russian invasion.”
Have high inflation and broader economic volatility also sparked fears among some economists and policymakers that wages and prices could be locked in a race, creating a 1970s-style wage-price spiral in which inflation continues to rise.
However, a return to the stagflationary environment of the 1970s is somewhat premature, said Lundh.
“It’s the kind of environment that lasts for years,” he said. “We could see some level of stagflation later in 2022 and into 2023 if growth rates really plummet well below potential and inflation stays above target, but I don’t necessarily think it’s going to be at the same level or the same duration as what we saw in the 1970s.”
The strength of Americans’ balance sheets and income statements is helping to allay concerns, said Tim Mahedy, a senior economist at KPMG.
People have a savings cushion from federal spending programs during the pandemic, he said, noting that while revolving credit as a proportion of personal income has increased from last year, levels remain healthy.
“We cannot continue as before, but consumers still have some time until inflation hopefully comes down,” he said, stressing that inflation data and Fed actions will prove crucial in the coming months.
If inflation doesn’t cool down Consumers will then experience more pain in the coming months, he said.
“We have some buffer and time, but we assume so.”