Inflation rates hit a record high in the USA in June 2022. Compared with 2021, consumer prices increased by 9.1%, which was the biggest yearly boost since 1981. Wages and salaries are rising at a much slower pace than inflation. With a 4.5% inflation rate, income growth has been consistent. However, inflation was already at 7.1% in November. How is inflation related to wages? How does it affect American consumers?
Consumers Are Affected By Inflation
More and more Americans are living paycheck to paycheck. Sad statistics show that millions of consumers struggle to support the basic needs of their families. Thousands of people opt for lending tools to finance their immediate cash needs. It is becoming more and more difficult for them to cope with rising prices at gas stations or grocery stores or pay for rent.
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So, two-thirds of employees stated their wages aren’t keeping up with higher prices. So, Americans feel strapped for cash and don’t understand why their income isn’t keeping up with rising inflation rates. Workers are willing to bargain for higher salaries in an attempt to respond to higher prices.
After the global pandemic started, wages have become more sensitive to projected inflation rates than in the past. The influence of inflation projections on salaries appears to be more long-lasting than we’ve thought.
Many advanced economies, including the USA, are suffering from rising inflation due to several factors: pandemic assistance programs, disruptions to supply chains, and the war in Ukraine.
The Impact of Inflation on Annual Pay Raise
There is a strong connection between inflation and your annual income. Many employees experienced this impact last year as their salaries weren’t anywhere near the inflation rates, which hit a record high in the four decades. Although annual pay was boosted a bit, it couldn’t keep up with the Consumer Price Index, as it had already reached 9% at the beginning of 2022.
In other words, workers have realized that they need to pay more for basic needs from food to housing and gas than they earn. Their actual salaries aren’t keeping up with rising inflation, which is a problem.
Why Your Annual Pay Doesn’t Match Inflation
The chart from the FRBSF Economic Letter shows short-term and long-term inflation expectations. According to this survey, consumer price index inflation and household expectations for inflation are projected to grow in the next 5-10 years. The figure emphasized the dramatic increase in prices over the past year and how expectations for near-term inflation have ticked up, though long-term expectations are more stable.
So, why can’t your annual pay match inflation? As we’ve already mentioned, thousands of American consumers struggle to make ends meet as inflation rates cause prices to increase rapidly. It’s increasingly challenging to cover the rising rent payments, pay the bills, go to grocery stores, or fill up your car with gas.
Why can’t employers raise the annual pay together with inflation? The majority of companies and recruiters won’t do that as it will be difficult to claw the payback if inflation lowers in the future. Consumers will get used to the new annual pay and won’t want to keep on working for less.
Last year, recruiters did increase salaries for their employees. The average increase used to be 3% for annual pay. However, employers increased the average wage by 4.8% in 2021, which is almost two percentage points higher than before.
Defining the Economic/Pay Budget Relationship
Consumers struggle to cover their essential needs as inflation increases, and the paycheck doesn’t keep up with it. They rely on various crediting tools. Credit cards, personal loans, small online loans, and payday lending options are among the most popular ways of getting additional cash to finance essential purchases and daily needs.
Those who have solid savings accounts may tap some funds from them, but they could also benefit from letting their deposits stay in savings funds. Rising inflation rates and the recent rate hikes increase by the Federal Reserve allow consumers to increase their earnings from savings funds.
If you want better to understand the relationship between economic situation and paycheck, there are some of the most important terms to keep in mind.
- This term is generally defined as a yearly change in prices for various services and goods. The global pandemic has boosted inflation rates to new records which have never been seen since the 1980s. Prices are still rising, so inflation may also keep on rising. Even when the rate of inflation goes down, wages don’t lower. It may mean that paycheck should increase together with inflation, but in reality, it doesn’t always happen this way. In fact, current salaries aren’t keeping up with rising inflation rates.
- Paycheck increase budget. This term means the pool of funds a company pays to boost wages. This budget concentrates on base paycheck boosts, generally including merit increases and promotions. It doesn’t include extra paycheck components and rewards such as health and wellness benefits, long-term incentives, and bonuses.
- Labor market shortage. This term means there are more vacancies than people with the necessary skills to fill these job openings. Labor market shortage may be general. It happens if a major number of consumers leave the workplace. It can happen due to new career changes, safety concerns, or retirement. This is what occurred in the USA not so long ago. Besides, labor shortage may be specific and connected with particular positions when the demand for particular skills boosts quicker than the supply of workers with these skills.
The Bottom Line
Summing up, inflation and wages are connected. However, while inflation rates hit a record high once again, the annual paycheck doesn’t keep up with this increase. So, Americans need to adapt to higher prices and boost their savings to avoid getting into debt.