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Report: Wages posted their biggest increase in 10 years, but inflation is canceling out gains

Posted by Neha De

August 10, 2021 | 2-minute read (395 words)

Inflation has been known to eat into workers’ earnings. This was highlighted again in the U.S. Bureau of Labor Statistics’ Real Earnings for June 2021 report. Even though employees saw the biggest pay rise in more than a decade, high levels of inflation have eaten away at the gains.

According to the BLS report, average hourly earnings went up 3.6%, to $30.40, in June compared with a year ago. Based on the data gathered by the Economic Policy Institute, this has been the biggest pay spike since January 2009.

On the other hand, the consumer price index (CPI), which is a measure of inflation, rose 5.4% over the same period — the highest jump since August 2008.

Keeping in mind seasonal adjustments, together, this equates to a 1.7% loss in buying power, on average. And because prices are growing faster than wages, Senate Republicans are of the opinion that, in effect, Americans are essentially getting a pay cut.

Affluent individuals usually have money invested in financial assets such as real estate or stocks and may be in a better position to offset the impact of inflation. However, it is the lower-wage earners — ones that spend a large chunk of their average wages on food, gas and other essentials (which may be rising in price) — who are impacted by rising inflation the most.

What do the experts say?

Some economists attribute rising inflation to short-term dynamics, such as supply constraints. They believe that even though inflation has been unstable, it may be short-lived and this reduction in buying power could be impermanent. As the U.S. economy rebounds from the coronavirus pandemic and lower-wage employees return to work, the average earnings may not appear so bleak.

However, there are those who disagree. Take for instance, Mohamed El-Erian, the chief economic adviser at Allianz SE, who told Bloomberg, “Inflation is not going to be transitory.” He added, “I have 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.”

The bottom line is only time will tell whether this rising inflation is temporary. However, as per the Economic Policy Institute’s Nominal Wage Tracker, the economy (and its workers) could definitely benefit from consistent wage growth significantly higher than 3.5% for an extended period of time.

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