In the US they prepare for the increase in interest rates 2:32
San Francisco (CNN Business) --
American workers have seen their wages rise faster than at any time since the mid-1980s. But inflation has risen so fast that workers have actually taken a cut. wage.
Every time inflation rises, it takes a chunk out of workers' wages and depletes their bank accounts.
And this current stretch of inflation, triggered by a confluence of events such as the war in Ukraine and the continuation of the pandemic, has a ravenous appetite.
ANALYSIS |
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This means wage increases have actually turned into losses, and according to the latest inflation report, consumer prices soared 8.6% in the year to May.
As a result, the average consumer has to shell out about $460 more each month than this time last year to pay for the same goods and services, according to Moody's Analytics.
In addition, a University of Michigan study found that real disposable income per capita is on track for the biggest annual decline since 1932.
And, to make matters worse for American workers, the Federal Reserve has embarked on a campaign of interest rate hikes aimed not only at controlling inflation, but also at wage growth.
"When the Federal Reserve meets and makes its policy decision, most people don't understand that what the Federal Reserve is saying is, 'They're making too much money, their wages are going up too fast, and we've got to curb demand for money. and we need to curb wage increases,'" said William Spriggs, an economics professor at Howard University in Washington and chief economist for the AFL-CIO.
Shoppers stroll through the Georgetown neighborhood of Washington DC.
But wage growth isn't materially driving inflation, said Mark Zandi, chief economist at Moody's Analytics.
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"The causality is from inflation to wages, not from wages to inflation," he said.
Instead, the main drivers of the current price increases are actually a series of extreme supply shocks, including global supply chain bottlenecks and the war in Ukraine, Spriggs said.
"You can't just eliminate the increased production of wheat, the increased production of edible oil, the increased production of fertilizers, the increased production of oil, the increased production of natural gas, the increased production of [semiconductor] chips used in cars and to think that there is not going to be inflation," he said.
"When it's in the American news, you get
the idea that if our stimulus checks had been lower, and if our wages had been lower, we wouldn't have this inflation. No one in the world accepts that view."
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Wages won't go as far
America may not technically be in a recession, but it's beginning to look like it to many people.
"When you start looking at that data, you start thinking that maybe the people who are really distressed are right, that the situation is much more dire from an economic standpoint than the data that economists normally look at," said Donald Grimes. , an economist at the University of Michigan who has done research on trends in real after-tax income.
Nominal wages for full-time workers have risen an average of about 5% in the 12 months ending in May 2022, according to the Federal Reserve Bank of Atlanta's Wage Growth Tracker.
Tight labor markets, a renewed movement to strengthen workers' rights, and efforts by states and some large employers to raise minimum wages have all contributed to significant wage growth over the past year.
A motorist fills up gas at a Valero gas station, Saturday, June 11, 2022, in Houston.
However, when you factor in inflation, real wages are down a negative 3.5% over that same period, and are down in the vast majority of sectors, 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 actually being undermined," said Erik Lundh, chief economist at The Conference Board.
Real disposable income levels are more or less where they were before the pandemic, Grimes said.
However, they are not behaving as they normally do, which would be to grow at a rate of 2% to 3% per year.
Instead, they are on track to drop 5.6%, he said.
The sharp drop is due in part to inflation, but also to the end of federal aid for the pandemic.
"For the people who saved some of that money to support their expenses, life is probably still pretty good," he said.
"But for people living paycheck to paycheck, that decline in real disposable income...is much more distressing than economists and policymakers realize."
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Can the Fed fix this?
The Federal Reserve is in a shaky position.
As he raises interest rates to tame inflation, he has to try not to push the economy into a recession.
On Wednesday, the Fed committee said in its statement that it was "strongly committed to bringing inflation back to its 2% target," indicating more aggressive hikes are not ruled out.
The Fed also said it doesn't expect inflation to slow this year and expects unemployment to rise to 3.7% in 2022, above its March estimate.
"I think they have a fighting chance to land the budget plane on the runway without crashing it," Zandi said.
"We need a little luck with the pandemic and with the consequences of the Russian invasion."
High inflation and general economic volatility have also led some economists and policymakers to fear that wages and prices will enter a race, creating a 1970s-style price/wage spiral in which inflation spikes even higher. .
What if the Fed can't control inflation?
However, thinking of going back to the stagflation environment of the 1970s is a bit premature, Lundh said.
"That's the kind of environment that goes on for years," he said.
"We may see a degree of stagflation, later in 2022 and in 2023 in terms of growth rates really collapsing well below potential and inflation staying well 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".
US Federal Reserve Chairman Jerome Powell speaks during a news conference at the Federal Reserve Building in Washington on June 15, 2022.
The strength of Americans' balance sheets and income statements helps ease concerns, according to Tim Mahedy, senior economist at KPMG.
People have a cushion of savings from federal spending programs put in place during the pandemic, he said, noting that while revolving credit as a share of personal income is higher than last year, levels remain healthy.
"We can't keep doing what we're doing, but consumers have some time for inflation to hopefully come down," he said, stressing that the Fed's readings and actions over the coming months will be critical for inflation.
If inflation doesn't start to cool in the next two months, consumers will start to feel the pain more, he said.
"We have some margin and time, but we are running out."
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