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Wednesday, December 7, 2022

Despite Rise In Wages, Inflation Eats Into Earnings Leading To A 2% Drop In Real Earnings: Absence Of Stimulus Check Felt More Than Ever

Three more states are set to send out stimulus checks for residents to help them cope with the economic disruption caused by the record inflation. The sustained rise in prices over more than a year has affected even the upper middle class while it has been a harrowing period for the low and moderate class who are yet to recover from the economic downturn sparked by the pandemic.

For the first time in decades, Americans are facing a negative increase in wages in real terms despite an apparent increase post the pandemic. The average hourly wages have increased by 3.6% in June relative to 2021 figures.

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Real wages are a measure of income after accounting for the cost of goods and services people buy. It is the most in more than a decade. But inflation has essentially ensured that in real terms it works out to a 2% cut in wages when inflation is factored in. this was revealed by the Bureau of Labor Statistics.

It is similar to getting a pay cut in real terms. The figures are more pronounced in some areas. With higher prices for gas, airfare, laundry, moving costs, hotels, regular food items, and televisions, it is apparent that the staples of American life are increasing exponentially.

But while the thrust of the argument is true to a large extent, there are subtle nuances. For instance, whether a consumer gets a cut in wages in real terms depends on both their individual earnings and also the things they buy.

Wage Growth And Inflation In The Absence Of A Stimulus Check

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If prices continue to grow faster than wages, people are getting pay cuts that are inflation adjusted. And this may vary drastically for every individual.

Further, inflation has been volatile of late and may even turn out to be temporary, as it has done in the past. Thus a reduction in buying power could not last long, economists hope. Economists blame the stimulus checks.

But that could be sometime in the coming and promotes the need for an immediate stimulus check to lessen the hardship that low-income families are facing at present. With the midterms in November, it could be some time before the federal administration takes any firm action to rein in the runaway inflation rate.

The average hourly earnings has risen by a healthy 3.6% in June when compared with the same period in 2020 when the pandemic was at its peak. It constitutes the biggest rise since January 2009, according to Economic Policy Institute.

But in the same period, the consumer price index, the measure of inflation, rose 5.4%. it is the highest since August 2008. Taken together, this means a loss of 1.7% in the purchasing power of citizens on average once seasonal adjustments are factored in.

Low And Moderate Earners Most Affected By Inflation In Absence Of Federal Support

Inflation has the most devastating impact on low earners. Most low and moderate earners live paycheck-to-paycheck even during normal times, they are forced to spend most of their income on gas, food, utility bills, credit card bills, home rent, and other essentials. And they are the ones affected immediately when prices spike suddenly without a matching increase in earnings. And stimulus checks are what they want.

Middle and high-income households who tend to hold more financial assets like stock or homes are comparatively better able to offset the adverse impact of inflation. But the pay cut has not been across all sectors. The 5.4% spike in annual inflation is an average of many essential items, and all households do not necessarily buy the items that have seen a marginal increase in wages.

For instance prices of gasoline and used vehicles are both up 45% since June 2020. And they both are included in the metrics used for calculating inflation. People who did not buy used cars or used public transit would not be affected to the extent of people who drive long distances daily or who have bought a vehicle recently.

In comparison, food prices are up a mere 2.4% over the same period, which is comfortably within the broader measure of inflation. So people can live within their means during tough times if they are careful about their spending and limit it to the bare essentials till they ride out the difficult times.

Shift In Consumer Behavior

The consumer price index has also not accounted for the shift in consumer behavior. People have made considerable changes in their lifestyles to avoid higher costs. stimulus check

People have made changes in every aspect of their lives, from the food they eat to putting off expensive purchases, like a car. People adapt to changes in price by shifting their consumption habits. stimulus check

The May personal consumption expenditure price index reveals that the index was 1.1% lower than the consumer price index annual reading, (3.7% against 5%), which indicates that consumers are shifting to goods that cost less or have given up or postponed non-essential purchases.

Another anomaly in calculating the real cost of inflation is the period being compared. Consumer prices had slid in the early days of the pandemic. so any comparison with that period will naturally lead to a higher picture of inflation at present.

Another issue is average earnings. It may appear a little suppressed as low-wage earners are rehired after the reopening of the economy. This will bring down the average wages a notch. The composition of any workforce changes substantially during recoveries and downturns. So it is difficult to interpret wage data during such a volatile period.

More States Step In With Stimulus Checks To Assuage Suffering Of Residents

The list of states moving in to support their residents with inflation relief stimulus checks has grown to 21. They have been encouraged by the funds allocated to states under the American Rescue Plan Act signed by President Biden in March 2021. Both Republican and Democratic states alike are using these funds despite reservations among the GOP-ruled states. stimulus check stimulus check 

With midterms around the corner, the GOP have toughened their attack on the federal government, blaming them for the inflation. But like Florida under Governor Ron DeSantis, they continue to benefit from the stimulus check funds and have used them to support their residents even as they continue to blame these funds for the present inflation rate. stimulus check stimulus check

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