Making more money is great, but it doesn’t mean much if you’re having a hard time making ends meet.
Although wages are rising, the prices consumers have to pay for goods and services are rising faster, hitting a new 40-year high in February.
As a result, inflation-adjusted real average hourly wages for the month fell 0.8%, contributing to a 2.6% decline from the previous year, according to the BLS.
“Wages have risen 5.1% over the past year, which is lagging behind inflation,” said Mark Hamrick, senior economic analyst at Bankrate.com. “Indeed, rising prices are stealing the show in the minds of consumers.”
When wages rise at a slower rate than inflation, wages don’t go that far to the grocery store and the gas pump, two areas of the budget that are becoming particularly squeezed.
Household grocery bills have risen 8.6% over the past 12 months, the largest increase since April 1981, according to the U.S. Department of Labor, while overall energy costs, including gasoline, are the largest. highest since July 1981.
“It is very difficult to completely evade inflation,” said Yiming Ma, assistant professor of finance at Columbia University Business School. “Some types of shopping can be postponed, but everyone needs to eat and everyone needs to go to work.”
“People don’t buy groceries, gasoline or electricity because they love these things; they buy them because they need them,” Hamrick said.
Studies show that these recent price spikes have already had an impact.
Two-thirds of American workers say their pay isn’t adequate to cover the rising cost of inflation, according to a report by Credit Karma, which surveyed more than 2,000 adults in February.
Of adults who have felt the impact of inflation over the past year, nearly three-quarters, or 74 percent, said that price hikes hurt them financially, according to a separate Bankrate.com report.
About 64% of the U.S. population now lives off wage after paycheck, up from 61% at the end of last year and just before the high of 65% in 2020, according to another report from LendingClub.
More people could be forced to cut back on their spending, find a job that pays more, or dig deeper into their cash reserves, Hamrick said. “How consumers adapt will be key in the coming months.”
As for policy, the Federal Reserve raised its federal funds rate this week to help calm skyrocketing inflation and set the stage for more hikes to come.
When the Fed raises rates, borrowing becomes more expensive, thereby cooling demand and hopefully keeping prices down.
However, it will take a long time to feel the effects of these incremental moves, Hamrick said. “In terms of waiting for the Fed to do your job, that cavalry will be slow in coming.”
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