Your raise might be a pay cut
On Tuesday, we learned that inflation decelerated to an annual rate of 6.4% in January, down from 6.5% in December.
In total, inflation has now risen 16.2% since December 2019. For comparison, the entire 2010s decade saw total inflation rise 18.75%
That means if a given worker hasn’t seen their income rise at least 16.2% since December 2019, in economic terms at least, their “real” wages have fallen. For many Americans, it amounts to losing a significant chunk of purchasing power. It’s also why some workers feel like they’re falling behind even as raises keep rolling in.
How many Americans fall into that camp? A lot.
Macroeconomic policy analyst, Lida Weinstock, recently wrote in a congressional research service report that real wages, or wages that have been adjusted for inflation, have been declining since 2021. That’s despite nominal wages (i.e. wages which have not been adjusted for inflation) having increased 13.4% during that span.
While “real” wage declines might be bad news for Americans’ short-term budgets, it could be seen as good news at the Fed.
“Negative real wage growth might slow down demand for goods and services and could potentially help the Fed with cooling down the economy in the coming months,” Sinem Buber, lead economist at ZipRecruiter, tells Fortune.
The reason? If wage growth were to accelerate significantly it could signal the start of a wage-price spiral, in which wage growth and improved demand create a feedback loop that continues to send inflation upward.
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