This is how a Federal Reserve rate hike affects your salary

San Francisco (CNN Business) – American workers have seen their wages rise faster than at any time since the mid-1980s, but inflation has risen so fast that workers have already taken a pay cut.

Every time inflation rises, it takes a large portion of workers’ wages and depletes their bank accounts. And this current stretch of inflation, caused by the confluence of events like the war in Ukraine and the ongoing pandemic, has a voracious appetite.

This means that the wage increase has actually turned into losses, and according to the latest inflation report, consumer prices rose 8.6% in the year to May. As a result, the average consumer would have to pay about $460 more per month than this time last year to pay for the same goods and services, according to Moody’s Analytics. Additionally, a University of Michigan study found that real disposable income per capita is on track for the largest annual decline since 1932.

To make matters worse for American workers, the Federal Reserve embarked on a campaign to raise interest rates to control not only inflation, but wage growth as well.

“When the Federal Reserve gets together and makes its decision on policy, most people don’t understand that what the Fed is saying is, ‘They make a lot of money, and their wages are going up very quickly, and we have to say,’ said William Spurges, professor of economics at Howard University in Washington and chief economist at the AFL. -CIO: “Cash demand for money. We need to limit wage increases.”

Shoppers strolling through the Georgetown neighborhood of Washington, DC.

Mark Zandi, chief economist at Moody’s Analytics, said wage growth is not actually driving inflation.

“Causality is from inflation to wages and not from wages to inflation,” he said.

Instead, the main drivers of the current price increases are actually a series of severe supply shocks, including global supply chain bottlenecks and the war in Ukraine, Sprigs said.

“You can’t just eliminate increased wheat production, increase edible oil production, increase fertilizer production, increase oil production, increase natural gas production, increase flake production. [semiconductores] Used in cars I think there will be no inflation. “When it’s in the American news, you have
The idea that if our stimulus checks were lower, if our wages were lower, we wouldn’t have that inflation. Nobody in the world accepts this view.”

Wages won’t go that far

America may not technically be in a recession, but it’s starting to look like it to a lot of people.

“When you start looking at that data, you start to think that maybe the people who are experiencing real grief are right, and that the situation is much worse from an economic point of view than the data that economists usually look at,” Donald Grimes said. An economist at the University of Michigan did research on trends in real after-tax income.

Nominal wages for full-time workers increased on average by about 5% in the twelve months to May 2022, according to the Federal Reserve Bank of Atlanta’s wage growth tracker. Tight labor markets, the renewed movement to promote workers’ rights, and efforts by states and some large employers to raise the minimum wage have all contributed to significant wage growth over the past year.

A motorist fills gasoline at a Valero gas station, Saturday, June 11, 2022, in Houston.

However, when factoring in inflation, real wages have fallen by negative 3.5% over the same period, declining in the vast majority of sectors, according to CNN’s business analysis of data from the US Bureau of Labor Statistics.

“In terms of real purchasing power, a lot of the gains are already being undermined,” said Eric Lund, chief economist at The Conference Board.

Grimes said levels of real disposable income are more or less what they were before the pandemic. However, they are not behaving as they normally would, which would grow at a rate of 2% to 3% per year. Instead, he said, they’re on track to fall 5.6%.

The sharp drop is due in part to inflation, but also to the end of federal aid to the pandemic.

“For people who have saved some of that money to support their expenses, maybe life is still fairly good,” he said. “But for people who live from paycheck to paycheck, this decline in real disposable income … is far more distressing than economists and policy makers realize.”

Can the Fed fix this?

The Federal Reserve is in a precarious position. And while he raises interest rates to tame inflation, he should not try to push the economy into recession.

On Wednesday, the Fed said in its statement that it is “strongly committed to returning inflation to its 2% target,” suggesting that further sharp increases were not ruled out.

The Fed also said it does not expect inflation to slow this year and expects unemployment to rise to 3.7% in 2022, above its March estimate.

“I think they have a fighting chance of landing the economy plane on the runway without crashing,” Zandi said. “We need a little luck with the epidemic and the consequences of the Russian invasion.”

High inflation and general economic volatility have led some economists and policy makers to fear wages and prices are entering a race, resulting in 1970s-style price/wage rises where inflation rises further.

However, considering a return to the stagflation environment of the 1970s is a bit premature, Lund said.

“This is the kind of environment that lasts for years,” he said. “We may see some degree of stagflation, later in 2022 and in 2023 in terms of growth rates that really collapse below potential and inflation stays well above target, but I don’t necessarily think it will be at the same level or the same period as We saw in the seventies.”

US Federal Reserve Chairman Jerome Powell speaks during a press conference at the Federal Reserve Building in Washington on June 15, 2022.

The strength of US balance sheets and income data is helping to ease concerns, according to Tim Mehdi, chief economist at KPMG.

People have savings from federal spending programs put in place during the pandemic, he said, noting that while revolving credit as a share of personal income is higher than last year, levels remain healthy.

“We can’t keep doing what we’re doing, but consumers have some time for inflation to hopefully come down,” he said, stressing that the Fed’s readings and actions over the coming months will be crucial to inflation.

He said that if inflation does not begin to subside in the next two months, consumers will start to feel more pain.

“We have some time and margin, but we ran out.”

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