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Workers saw their hourly wages rise in June at the fastest clip in more than a decade. However, some of them saw those gains offset by high inflation.
“Real wages” — a measure of income that takes into account the cost of goods and services people buy — fell an average of nearly 2% last month compared to 2020. Senate Republicans said Wednesday that Americans got a pay cut as a result.
“The staples of American life are increasing exponentially,” said Sen. Tim Scott, R-S.C., citing examples such as higher prices for gas, laundry, airfare, moving costs, hotels, bacon, and TVs.
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The thrust of the argument – that inflation affects rising wages – is true, according to economists. Still, there are many nuances, they said.
First, whether or not they get a pay cut depends on their individual earnings and the things they buy.
“If prices grow faster than wages, people get inflation-adjusted wage cuts,” said Michael Strain, director of economic policy studies at the American Enterprise Institute, a right-wing think tank. “Ultimately, this varies dramatically for each individual.”
In addition, inflation has been volatile and may turn out to be temporary, meaning a decline in purchasing power could be short-lived, economists said.
Inflation and wage growth
Average hourly wages rose 3.6% to $30.40 in June, compared to the same month in 2020. That’s the biggest spike since January 2009, according to data collected by the Economic Policy Institute.
Meanwhile, the consumer price index, a measure of inflation, has risen 5.4% over the same period – the most since August 2008.
Together, this amounts to an average loss of purchasing power of 1.7%, taking into account seasonal adjustments, according to the Bureau of Labor Statistics.
“Inflation is a tax,” said William Foster, vice president at Moody’s Investors Service. “That’s the best way to think about it.”
Inflation has the greatest impact on lower income earners, who spend more of their average dollar on gas, food and other items that may rise in price, Foster said. Wealthier individuals, who typically hold more financial assets such as stocks or homes, may be better able to offset the impact of inflation, he added.
But not everyone necessarily got a pay cut as a result. The 5.4% increase in annual inflation is an average of many items – and households don’t necessarily buy the ones that get much more expensive.
For example, the statistic includes used car and truck prices, which are up about 45% from June 2020 – their biggest change ever. That price shock wouldn’t hit anyone’s wallet unless they bought a used car.
Similarly, gasoline prices have risen by 45%. Those extra costs would be borne by drivers, though perhaps not city dwellers traveling on public transport.
By comparison, food prices have risen only 2.4% over the same period, below the broader inflation measure.
The consumer price index also does not account for shifts in consumer behavior, who may change what they buy to avoid these higher costs.
For example, you can switch to beef chicken to save money, or put off buying a car until prices drop.
“People respond to price changes by shifting their consumption,” said Noah Williams, a professor of economics at the University of Wisconsin-Madison and adjunct fellow at the Manhattan Institute.
The price index for personal consumption expenditure, another measure of inflation, explains these shifts. The Bureau of Economic Analysis has not yet released the figure for June. But in May, the PCE index was 1.1 percentage points lower than the annual reading of the consumer price index (3.9% vs. 5%) – indicating that consumers were buying cheaper goods.
However, these shifts still come at a cost to consumers, if not explicitly, according to Casey Mulligan, a professor of economics at the University of Chicago.
“They try to minimize the evil, but they are both evils,” said Mulligan, who served as chief economist for the White House Council of Economic Advisers during the Trump administration.
According to economists, there is also reason to be wary of over-interpreting inflation and wage figures as the US economy recovers from the Covid-19 pandemic.
This is due to economic disruptions caused by the virus. For example, consumer prices fell early in the pandemic. If we compare today’s prices with lower prices a year ago, inflation rates will naturally appear high.
Similarly, wage data could be skewed by a disproportionate number of layoffs among low-paid workers during the pandemic. For example, in April 2020, the average hourly wage rose by 8% (the highest ever), even despite massive layoffs, as more high earners were employed.
Perhaps the same is happening now, but in reverse. As the economy picks up again and lower wage workers are rehired, average incomes may appear suppressed.
“It can be a little misleading” to suggest that employees get a pay cut, according to Susan Houseman, director of research at the W.E. Upjohn Institute for Labor Research.
“[The composition of the workforce] changes especially during downturn and recovery, so you have to be careful about interpreting this data,” she said.
Temporary or not?
According to economists, it is unclear whether higher consumer prices and wages are temporary or longer-lasting.
However, at least some of the inflation could be explained by likely short-term dynamics, such as supply constraints and a surge in demand as consumers emerge from pandemic-induced hibernation, they said.
The high recent gas prices, for example, were partly caused by the fact that major oil-producing countries were unable to reach an agreement at the beginning of July on increasing oil supplies, AAA said. And a shortage of microchips has led to a spike in car prices.
However, some expect inflation to continue.
“Inflation will not be transient,” Mohammed El-Erian, the chief economic adviser at Allianz SE, told Bloomberg TV on Friday. “I have a whole list of companies that have announced price increases, who have told us that they expect further price increases and that they expect these to continue,” he added.
According to the Labor Department, wages appear to have risen in recent months due to rising demand for workers. Increased wages can last longer than high inflation because companies often don’t cut their wages after raising it, Houseman said.
“We don’t normally give people pay cuts,” she said. “Employers usually don’t.
“So in that sense, they’re stickier.”