Every time inflation rises, it eats into workers’ wages and eats away 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 had a voracious appetite.
Worse still for American workers, the Federal Reserve has embarked on a rate-hike campaign aimed not only at reining in inflation, but also wage growth.
“When the Fed meets and makes its policy decision, most people don’t understand that what the Fed is saying is ‘you’re making too much money, your wages are rising too fast, and we need to slow the demand for labor. work, and we need to slow wage increases,” said William Spriggs, professor of economics at Howard University in Washington, DC, and chief economist of the AFL-CIO union.
But wage growth is not, to any significant degree, driving inflation, said Mark Zandi, chief economist at Moody’s Analytics.
“Causality runs from inflation to wages, not from wages to inflation,” he said.
“You can’t just remove major wheat production, major edible oil production, major fertilizer production, major oil production, major natural gas production, major [semiconductor] chips used in automobiles and think you’re not going to get inflation,” he said. “When that’s featured in the US news, you get this idea that if our stimulus checks had been lower and if our wages had fallen, that we would not have this inflation. No one in the world accepts this point of view.”
Paychecks won’t stretch that far
America may not technically be in a recession – but for many people it is certainly starting to be.
Adjusting for inflation, however, real wages are hovering minus 3.5% over the same period, and they’re down across the vast majority of industries, according to a CNN Business analysis of Bureau of Labor data. United States Statistics.
“In terms of actual purchasing power, a lot of the gain is basically getting the rug pulled out from under you,” said Conference Board senior economist Erik Lundh.
Real disposable income levels are about where they were before the pandemic, Grimes said. However, they don’t behave like they normally do, which would be to grow at a rate of 2 to 3% per year. Instead, they are on track to fall 5.6%, he said.
The sharp drop is partly due to inflation, but also to the end federal pandemic assistance.
“For people who saved some of that money to support expenses, life is probably still pretty good,” he said. “But for people living paycheck to paycheck, this decline in real disposable income…it’s a lot more painful than economists and policymakers think.”
Can the Fed solve this problem?
The Fed is indeed in a precarious position. While it raises rates to tame inflation, it must try not to plunge the economy into a recession.
The Fed committee said in its statement on Wednesday that it was “strongly committed to bringing inflation back to its 2% target,” indicating that more aggressive hikes are not ruled out.
The Fed also said it does not expect inflation to decline this year and sees unemployment rising to 3.7% in 2022, higher than its March forecast.
“I think they have a chance to land the economy plane on the tarmac without crashing it,” Zandi said. “We need some luck on the pandemic and on the fallout from the Russian invasion.”
However, a return to the stagflationary environment of the 1970s is a bit premature, said Lundh.
“It’s the kind of environment that’s been going on for years,” he said. “We can see a degree of stagflation, later in 2022 and 2023 in terms of growth rates really collapsing well below potential and inflation staying well above target, but I don’t think not necessarily that it will be at the same level or the same duration as what we saw in the 1970s.”
The strength of Americans’ balance sheets and tax returns are helping to ease concerns, said Tim Mahedy, senior economist at KPMG.
“We can’t keep doing what we’re doing, but consumers have time for inflation to hopefully come down,” he said, pointing out that the inflation numbers and shares of the Fed over the next few months will prove critical.
If inflation doesn’t start to cool within the next two months, consumers will begin to feel more pain, he said.
“We have buffer and time, but we are running out.”