When it appeared the threat of the COVID-19 pandemic was starting to wane, the economy opened up and wages rose as demand for workers increased. In fact, there was a record high number of jobs available, and the competitive labor market forced companies to pay more in order to attract workers. As a result, between March and June of 2021, there was a 2.8% increase in compensation.
This seems like good news. But the increase in compensation does not adjust for inflation. And despite the fact that wages are rising, inflation is outpacing wage growth. In fact, an analysis by a Harvard University economics professor revealed that, in real terms, average compensation is below what Americans were making in December of 2019 after accounting for the effects of inflation.
That means Americans’ raises have disappeared due to the increased cost of goods and services. So the typical American is actually making less than they were before the COVID-19 pandemic, once inflation is taken into account.
Read on to see why Americans may not be able to keep as much money in their bank accounts due to inflation.
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Rising prices mean Americans can buy less even with higher wages
Over the past year, the Consumer Price Index saw a 5.4% increase, which is the largest increase that has occurred since the middle of 2008. Just in June alone, there was a 0.9% increase in the Consumer Price Index. This index measures how prices are changing for the essential goods and services that most Americans purchase regularly.
Anyone who has made a purchase lately is likely well aware of the fact that most things cost more money now. Gas and food prices, in particular, have been soaring, and both home and rent prices have also increased dramatically. And the price of both new and used cars have hit record highs.
Wage growth, unfortunately, has not kept up with these price increases. The Employment Cost Index, which factors in both wages and workplace benefits, is 2% below the pre-pandemic trend after inflation is taken into account. (This index is a more accurate measure of how well workers are compensated for their work because it keeps the composition of the workforce consistent when collecting data.)
The Employment Cost Index fell in the most recent quarter, suggesting that the trend of price increases outpacing wage growth is continuing or even accelerating.
Americans are most likely feeling the effects in their pocketbooks. Since the cost of goods and services has increased more than wages have, people may be making more money but their salaries are buying less.
How long is this expected to last?
Both the Federal Reserve and President Joe Biden believe that this rapid inflation is a short-term trend driven by the unique circumstances surrounding the rapid reopening of the post-pandemic economy. However, it’s not yet clear if inflation will be transitory or whether the steep rise will continue for an extended period of time and result in price increases becoming entrenched.
If the latter occurs, Americans will have to find ways to account for the decline in purchasing power. Careful budgeting and living within means will become crucial to avoid ending up in credit card debt or struggling to accomplish financial goals.
View more information: https://www.fool.com/the-ascent/personal-finance/articles/inflation-made-americans-pay-raises-disappear/