Breaking: Why Rising Wages Are Not Keeping Pace With Inflation

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Rising Wages Can Not Catch Rising Prices

Remember the old good news, bad news jokes? Here is a new one that probably will not strike your funny bone.

Congratulations average American worker. Your hourly wage has increased 5.2 percent over the past year, according to the Bureau of Labor Statistics. That is the good news. The bad news is that inflation has increased 8.3 percent over the same time period.

Buying Power Drain

“Clearly the high inflation is undermining Americans’ purchasing power,” Mark Zandi, chief economist at Moody’s, told NBC News.

Zandi says the average household is spending $460 more a month to buy the same goods and services they used a year ago.

Push For Higher Wages

High prices are pushing workers to seek higher-paying jobs, according to Indeed.

Last month signaled a shift in searches for $15 an hour to $20 an hour jobs, according to the job search platform. Year over year searches for $20 an hour jobs increased 35.5 percent while searches for $15 an hour jobs decline 57.3 percent.

“Wage gains and inflation are likely influencing job seekers’ expectations toward higher dollar amounts,” says AnnElizabeth Konkel, Indeed Hiring Lab economist.

Why Wages Do Not Move In Step With Inflation

Typically, inflation and wages move in the same direction. However, they change at different rates.

Inflation reflects changes in the price of certain goods and services. However, wages are driven by a variety of factors. For example, the current surplus of jobs versus the supply of labor has pushed wages higher. In addition, changes in technology and increased productivity can impact wages.

Generally, wages tend to outpace inflation in times of low inflation.

As recent as 2020, inflation was only 1.4 percent. However, salary budgets were up over 2.5 percent, according to the Bureau of Labor Statistics.

Conversely, Wages lag behind price increases during high inflation.

Wages Less Volatile Than Inflation

Another factor that keeps wages from keeping up with high inflation is that they usually do not decrease. As a result, employers tend to boost pay slowly on fears of increasing their costs. Even though unemployment spiked to almost 15 percent during the pandemic, there were few pay cuts.

In addition, employee benefits, which are not factored into wages, increased 4.8 percent year-over-year in June 2021, according to the BLS.

Price Wage Spiral

The push for higher wages is a natural response to rising prices. However, some economists fear that businesses will raise prices to cover the cost of higher wages. Then, workers would again seek higher wages to cover prices. In response, businesses would again raise prices to pay higher wages. That phenomenon is known as the price wage spiral.

Despite high prices and a demand for better wages, a price wage spiral may not be imminent.

Inflation is declining. It peaked at 9.1 percent in June, dropped to 8.5 percent in July, and 8.3 percent in August.

“Wages are up this year because of inflation, but expectations are this won’t remain the case,” says Jesse Wheeler, Morning Consult analyst. “So, the mindset that inflation won’t stay high will prevent falling into the wage-price spiral for now.”

Dealing With The Pain

The downward trend of inflation and analysts’ projections that prices will decline do not ease the pain of higher prices.

A Gallup Poll released last week shows 56 percent of Americans say rising prices are creating a hardship for their families.

Many Americans have not experienced inflation before this year. As a result, they may be fearful of what lies ahead. Yet, we only have to look back about 40 years to see how the economy moved out of high inflation and into decades of low inflation.

In 1980, inflation peaked at 14.6 percent. That is the highest peacetime rate in history and over six percent above the current rate. Over a couple of years, inflation was tamed and we entered an extended period of low interest and prices.

It is difficult to grasp, especially if you have never been through such a period of rising prices. However, there is precedent for saying, this too shall pass.

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