Soaring inflation takes a big chunk out of workers’ paychecks

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Earning more money is great, but it doesn’t mean as much if you’re struggling to make ends meet.

Although wages are rising, the prices consumers have to pay for goods and services are rising faster, hitting a new 40-year high in February.

As a result, average real inflation-adjusted hourly earnings for the month fell 0.8%, contributing to a 2.6% drop from a year earlier, according to the BLS.

“Wages are up 5.1% from a year ago, lagging the pace of inflation,” said Mark Hamrick, senior economics analyst at Bankrate.com. “Indeed, soaring prices are stealing the show in the minds of consumers.”

When wages are growing at a slower rate than inflation, paychecks don’t go as far to the grocery store and the gas pump — two areas of the budget that get particularly tight.

Household grocery bills have ballooned 8.6% in the past 12 months, the biggest jump since April 1981, according to the US Department of Labor, while overall energy costs, including gasoline, have the most increased since July 1981.

“It’s very difficult to completely escape inflation,” said Yiming Ma, an assistant professor of finance at Columbia University Business School. “Some expenses can be deferred, but everyone needs to eat and everyone needs to go to work.”

“People don’t buy basic foods or gasoline or electricity because they like those things; they buy them because they need them,” Hamrick said.

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Studies show that these recent price spikes have already taken their toll.

Two-thirds of American workers say their pay is not enough to cover the rising cost of inflation, according to a report by Credit Karma, which surveyed more than 2,000 adults in February.

Among adults who have felt the impact of inflation over the past year, nearly three-quarters, or 74%, said price hikes had hurt them financially, according to a separate report from Bankrate.com .

About 64% of the US population is now living paycheck to paycheck, down from 61% at the end of last year and just shy of the peak of 65% in 2020, according to another LendingClub report.

How consumers adapt will be key in the months to come.

Mark Hamrick

Senior Economic Analyst at Bankrate

More people may be forced to cut spending, find better-paying jobs or tap deeper into their cash reserves, Hamrick said. “How consumers adapt will be key in the months to come.”

On the political front, the Federal Reserve raised its federal funds rate this week to help calm soaring inflation and set the stage for further hikes to come.

When the Fed raises rates, borrowing becomes more expensive, which cools demand and hopefully keeps prices low.

However, it will take a long time to feel the effects of these gradual moves, Hamrick said. “As for waiting for the Fed to do its job, that cavalry will be slow to arrive.”

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