30 Year High Inflation Could Nullify Relatively High Increases in Wage Earnings

Gas prices over $4 a gallon in Mill Valley, CA. Source: People

On November 10th the U.S. Bureau of Labor Statistics released a monthly report that showed some pretty grim indicators for the U.S. Economy. Inflation, or the general increase in prices, had climbed to its highest level in nearly 30 years. From Oct 2020 to Oct 2021, prices have risen nearly 6.2 percent. This is putting strain on American consumers as the economy is recovering from the COVID-19 shutdowns. 

There are a multitude of factors driving this increase in prices across American markets. For one, issues regarding supply chains are affecting the availability of products. There is a large backlog of shipping containers in the Los Angeles-Long Beach Port and Port of Houston, making it difficult to clear out existing containers.. Just a few days ago, there were over 108 cargo ships off the coast of the LA-Long Beach port waiting to dock and unload. 

A handful of factors have contributed to this backlog. Currently, there is a shortage of truck chassis necessary for container transport. Additionally, a shortage of nearly 80,000 truck drivers further contributes to the backlog. As less products hit shelves, prices tend to increase. However, that is not the only reason for markedly high inflation. As the U.S. economy has recovered from the pandemic-induced economic slowdown, consumers are demanding more products. 

During times of economic uncertainty or recession, Americans commonly increase their savings. Saving money rather than spending it takes money out of circulation. The savings rate, or percentage of disposable income held, increased from 7% in December 2019 to 34% in April 2020. Thus, there was a general detraction in demand for goods. The savings rate has fallen back down to 7.5% this September. So, there has been a considerable uptick in product demand. Naturally, as demand increases, prices do as well. In a sense, this phenomenon acts as the perfect storm — with an inability to increase product supply meeting a ballooning demand causing prices to soar.

Regardless, the government has undoubtedly played a role in inflation. At the onset of the pandemic, the Federal Reserve cut the federal funds rate to less than ¼ of a percentage point. Lowering the interest rates effectively increases the amount of money available. Doing this essentially stimulates greater market demand but also helps increase employment. Additionally, the government has assisted with two rounds of stimulus checks as well as expanded unemployment benefits. 

These moves were a double-edged sword. They helped combat the initial economic effects of the pandemic but have nonetheless contributed to the current state of affairs. The Fed could increase interest rates to combat inflation, but that comes with the risk of inducing a recession. The Fed is also reluctant to take money out of circulation as that may come with the cost of some employment. So, use of monetary policy may be off the table in the short term. 

To summarize, with the availability of money increased, Americans are using more of their disposable income, and currently, there is just too little to buy. Regardless, 6.2% inflation is painful for the average American. Gas prices are up nearly 50%, and meat, fish, poultry, and eggs are up 11.9 %. Price changes to goods like these hurt the poorest Americans the most. They use a more significant proportion of their income on inflated goods than wealthier Americans. Also discouraging is the fact that record-high inflation comes at a time when wage increases are relatively high. 

According to the Bureau of Labor Statistics, wage growth has increased 5.1% on the year. Workers are enjoying higher than average wage growth, but there is fear that inflation is mitigating these gains. In a sense, a 5% increase in earnings coupled with a 6% increase in prices means a net negative 1% change in purchasing power. So, laborers' hard-earned raises may be nullified or even harmful. 

Economic conditions are nevertheless politically potent. According to Gallup, Americans have increasingly cited the economy as the number one problem facing the country. Likewise, President Biden’s approval has fallen to 43%, while 51.6% disapprove as inflation remains high. Regardless, Americans recognize when they’re losing out economically. People notice when they have to pay more and more for simple items. Fixing inflation won’t happen overnight. The government cannot cure market woes overnight. So, expect inflation to saturate political discourse for much of the near future.