Despite Increasing Wages, Inflation Means the Average Worker Gets a 2% Pay Cut

Asian couple blow their money with empty wallet and feel shocked.
PonyWang / Getty Images/iStockphoto

While workers have seen a bump in their hourly wage, inflation may actually be giving workers a pay cut. Average hourly wages jumped 3.6% to $30.40 in June compared with the same month in 2020 due to rising demand for workers, reports CNBC. This is the largest increase since January 2009, according to data from the Economic Policy Institute. Meanwhile, the consumer price index increased by 5.4% over the same period, which is the most since August 2008.

See: Inflation, Wildfires and Drought Caused These 5 Food Products To Have a Price Jump
Find: Should the Fed Rethink Inflation as Delta Variant Scours the Country?

Despite wage increases, CNBC reported that data from the Bureau of Labor Statistics show that “real wages” — wages adjusted for inflation or wages in terms of the number of goods and services that can be bought — fell by almost 2% last month compared to 2020. According to economists, inflation can take away from rising wages, among other factors.

“Inflation is a tax,” William Foster, a vice president at Moody’s Investors Service, told CNBC. “That’s the best way to think about it.”

Foster said inflation impacts lower earners disproportionately, who spend a majority of their earnings on gas, food and other items. Foster also told CNBC that wealthier individuals tend to hold more financial assets which may be able to offset the impact of inflation.

Federal Reserve Chair Jerome Powell has said that the central bank expects the rise in inflation to be temporary as the economy recovers. Mr. Powell also added that the economy “is still a ways off” but officials expect progress to continue and will take necessary measures if needed, the Wall Street Journal reported.

Make Your Money Work for You

However, CNBC noted that economists are unsure if higher consumer prices and wages are temporary or long-lasting. While some of the inflation can be attributed to increased consumer demand and inventory shortages, some still expect inflation to persist.

For instance, the chair of Gramercy Funds Management, Mohammed El-Erian says that inflation is not going to be transitory. He shared on Bloomberg TV’s “The Open” show that he has, “a whole list of companies that have announced price increases, that have told us they expect further price increases and that they expect them to stick.”

See: Understanding the Differences Between Inflation, Deflation & Stagflation
Find: How to Defeat Inflation’s Sneaky Twin – Shrinkflation

However, Susan Houseman, research director at the W.E. Upjohn Institute for Employment Research, commented to CNBC that “it could be a little misleading” to say workers are getting a pay cut. She explained that increased pay may be longer-lasting than high inflation because businesses don’t typically cut pay after raising it.

We typically don’t give people wage cuts,” she told CNBC. “Employers typically don’t do that.”

More From GOBankingRates


See Today's Best
Banking Offers