Inflation is crushing wage increases

Wages are going up, but for some workers, the salary increase alone is barely making a difference.

“If you are working, you saw some big pay increases. However, for the lower-end and middle-income households, those pay increases from work were not enough on their own to keep up with higher costs.” That’s what Alexander Arnon, associate director of policy analysis for the Penn Wharton Budget Model, told me.

He is a co-author of the recent report, Did Wages Keep Up With Inflation in 2021? The wage growth rate is higher for the lowest-paid workers, whether it’s hourly or annual wages, Arnon explains. However, since they’re already starting way behind in pay levels, the higher growth rates translated into much smaller dollar amounts, he says.  

The other half of the equation is inflation and cost of living, Arnon says. 

“The inflation rates we’re seeing are higher for the lower-income households,” he says. In 2021, working households with income below $40,000 saw their cost of living rise 6.9%. That’s on par with the consumer price index reaching 7% in December 2021. Meanwhile, inflation fell to 6.1% for households with income above $150,000, the report found.

But working households with incomes below $20,000 faced the highest inflation rate of any group, according to the report. If these workers didn’t supplement their wage increases with other forms of income (such as the child tax credit), their purchasing power declined. In comparison, only households with incomes of $100,000 or more saw their annual wage income rise by significantly more than their consumption costs, the report found. 

When it comes to inflation, the key difference between lower-income and higher-income households is how much of their consumption budget is spent on energy and food, Arnon says. 

“Those are components of household spending that have seen the biggest price increases over the last year,” he explains. “And those make up a bigger part of the household budget from lower-income households.” Energy accounts for a smaller share of higher-income households’ spending, according to the report.

Wage increases continue

Over the past year, workers’ hourly pay has increased by 5.7%. Large companies like Amazon and Walmart have increased starting salaries for hourly workers. Following suit, on Monday, Target announced it is increasing starting wages up to $24 an hour. 

Arnon suggests the war for talent is playing a major role. Employers are having to increase pay to attract and retain workers, he says. Many economists, especially those who lived through the 1960s and 1970s, say a “nightmare scenario” is the “wage-price spiral” where workers demand higher compensation for inflation, which then drives up inflation, he explains. “But I don’t think we really have seen evidence of that yet,” Arnon says.

“I think there’s still some reason to be optimistic that we can eventually settle back into a more normal environment,” he says. Any advice for companies in the meantime? “Get ready to tough it out,” and accept that workers have the upper hand, Arnon says.

My previous piece on inflation got a lot of attention from readers. So, I’m curious to hear what you’re experiencing during high inflation. Send me an email.

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

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