Inflation is high, but wage gains for low-income workers are higher. For now

December 10, 2021, 9:20 PM UTC

Consumer prices rose 6.8% over the past year in the U.S., the highest number in nearly 4 decades, and an increase that typically reduces consumer purchasing power. Some workers are already feeling the pinch, but in an unexpected twist, many of the lowest-paid Americans received raises over the same time period that have mitigated the effects of inflation—at least for now.

U.S. inflation rates continue to climb month over month, with energy costs and car-related expenses driving the surge. In fact, November’s 6.8% increase is the fastest annual increase in the inflation rate since June 1982. 

What does this mean for workers? Overall, it hasn’t been good so far.

U.S. workers at private companies earned an average of $31.03 per hour in November, according to the Bureau of Labor Statistics. Over the past year, workers’ hourly pay has increased by 4.8%. 

But when you factor in inflation, real wages are down 1.9 % over the past year, according to the BLS. From October to November, real average hourly earnings for all employees decreased 0.4%. Going back to the start of the pandemic, real wages have declined roughly 1% since February 2020, Furman estimated.

Lower-wage workers are faring better. Thanks to the effects of the pandemic and the ongoing labor shortage, many companies have coughed up high-enough raises for their lowest-paid workers to mitigate rising inflation, according to Jason Furman, an economist and professor at Harvard University’s John F. Kennedy School of Government. TargetChipotle, and CVS, for example, raised their minimum starting wages to $15 per hour or more, while about two dozen states, including California and Florida, continued to increase the statutory minimum wages.

Furman calculates that the bottom quarter of workers have seen wage gains outpace inflation. He added that those in the second-lowest wage quartile had also been seeing enough wage gains to offset inflation earlier in the year, but that’s no longer the case. 

A similar analysis from Arindrajit Dube, an economist at the University of Massachusetts Amherst, found the lowest-paid workers received a wage increase of about 8%, but only about 5.5% of that gain was mitigated by inflation. The Boston Globe reports his research shows those in the bottom third of the pay scale have seen their real wages rise, while the top 70% have experienced a decline in real wages.

If this erosion of wage gains continues, it could put a heavier burden on U.S. families across the income spectrum. Many of the government stimulus programs that helped families stay afloat have ended, and even the advanced child tax credit payments are set to sunset this month unless Congress passes the Build Back Better act before the end of the year. 

On top of that, officials say that inflation is no longer a short-term, transitory trend. Although many economists believe that inflation rates will slow in December, they expect consumer prices to remain well above the Fed’s target rate of 2% into late next year. 

“Total CPI inflation is likely to slow in December, in particular because wholesale oil prices peaked in October at $85 dollars per barrel and are today $72 dollars per barrel. That will flow through to lower gas prices at the pump over time,” says says PNC Senior Economist Bill Adams. He also predicts that the current strain on global supply chains will ease after the holiday shopping season ends.

Furman also believes that monthly increases in consumer prices will come down a lot in the next few months. But while some prices will moderate, such as car costs, he expects others, like rent costs, to get worse.

Of course, Furman writes that his positive prediction assumes that Omicron varient does not cause widespread shutdowns in the U.S. economy or reductions in travel and dining. “If the reaction to Omicron is larger than I expect, then inflation would be lower, just like the Delta virus likely kept inflation lower.”

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