Minnesota’s Economic News — W/E 1/14/22
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When we talk about the negative effects of inflation, people often bring up the point that inflation does not hurt individuals when it is coupled with rising wages. Indeed, it is logical to expect that when wages are rising fast enough to keep up with prices, inflation should not present a big issue to consumers.
During the pandemic, however, wages haven’t risen at a high enough rate to keep up with inflation. According to an analysis by the Peterson Institute for International Economics, while wages have risen:
Prices, however, have risen even more rapidly than wages, and so inflation-adjusted compensation fell over the last three months and is now lower than it was in December 2019. Real compensation was on a rising trend prior to the pandemic and is now 2 percent below its pre-pandemic trend. While nominal compensation has grown faster in some sectors relative to its pre-pandemic trend, almost real compensation growth has been below trend in all sectors apart from leisure and hospitality, which is at its previous trend.
In June of this year, for example, the Bureau of Labor Statistics (BLS) announced that between June 2020 and June 2021, the CPI index –– which measures the change in prices paid by consumers for a basket of goods –– was up 5.3 percent. While wages also rose in the same period, it was not a high enough rate to keep up with inflation. Consequently, real wages were down 1.7 percent in the 12 months ending June 2021.
Nominal wages (wages not adjusted for inflation), which is what most people look at, have been rising even during the pandemic. However, prices have risen faster, especially after mid-2020. Effectively, real wages (wages adjusted for inflation) are lower compared to pre-pandemic levels. Most people have taken pay cuts due to inflation.
It does not bode well that the Federal Reserve Bank just announced that inflation will likely persist for the foreseeable future.