Every time inflation rises, it takes a cut of workers’ salaries and chews up their bank accounts. And this current stretch of inflation—caused by a combination of events, including the war in Ukraine and the ongoing pandemic—has a voracious appetite.
Making matters worse for American workers is the Federal Reserve, which has embarked on a campaign to raise interest rates to not only tame inflation but wage growth as well.
“When the Federal Reserve meets and makes its policy decision, most people don’t understand that what the Fed is saying is ‘You make a lot of money, your wages go up very quickly, and we need to slow down the demand for labor,'” said William Spurges, an economics professor at the University of Howard in Washington, D.C., chief economist for AFL-CIO: “Wage increases need to slow down.”
Mark Zandi, chief economist at Moody’s Analytics, said wage growth, to some extent, is not conducive to inflation.
The causal relationship extends from inflation to wages, not from wages to inflation. He said.
“You cannot simply remove the main wheat production, the main food oil production, the main fertilizer production, the main oil production, the main natural gas production, the main production of [semiconductor] “Chips are used in cars and you think you’re not going to get inflation,” he said. “When it’s shown in the US news, you get the idea that if our stimulus checks were lower, if our wages went down, we wouldn’t have that inflation. Nobody in the world would accept that as a view.”
Paychecks won’t extend that far
America may not technically be in a recession — but to many people, it’s surely starting to feel like one.
However, when factoring in inflation, real wages have run at negative 3.5% over the same period, which is low in the vast majority of industries, according to a CNN Business analysis of U.S. Bureau of Labor Statistics data.
“In terms of real purchasing power, a lot of the gain is basically pulling the rug out from under it,” said Eric Lund, chief economist at The Conference Board.
Grimes said levels of real disposable income are about what they were before the pandemic. However, they do not act as they normally do, which is growth At a rate of 2% to 3% per year. Instead, he said, they’re on track to fall 5.6%.
sharp drop Partly because of inflation, but also because of the end of federal aid for the pandemic.
“For people who have saved some of that money to support their spending, maybe life is still fairly good,” he said. “But for people living paycheck to paycheck, this decline in real disposable income…that’s far more distressing than economists and policy makers realize.”
Can the Fed fix this?
The Federal Reserve is already in a critical position. Since it raises rates to tame inflation, it needs to try not to push the economy into recession.
On Wednesday, the Federal Reserve said in its statement that it is “strongly committed to returning inflation to its 2% target,” noting that further sharp increases are not on the table.
The Fed also said it does not expect inflation to decline this year and sees the unemployment rate rising to 3.7% in 2022, higher than its forecast in March.
“I think they have a fighting chance of landing the economy plane on the runway without crashing it,” Zandi said. “We need a little luck with the epidemic and the fallout from the Russian invasion.”
However, a return to the stagflationary environment of the 1970s is somewhat premature, Lund said.
“This is the kind of environment that lasts for years,” he said. “We may see some degree of stagflation, later in 2022 and in 2023 in terms of growth rates that really collapse below potential and inflation stays well above target, but I don’t necessarily think it will be at the same level or the same duration that we saw in the seventies.”
Helping ease concerns is the strength of Americans’ balance sheets and income data, said Tim Mehdi, chief economist at KPMG.
“We can’t keep doing what we’re doing, but consumers have some time for inflation to hopefully come down,” he said, stressing that inflation readings and Fed actions over the coming months will be crucial.
If inflation does not start to cool off In the next two months, he said, consumers will start to feel more pain.
“We have some time and time, but we ran out.”