Inflation Made Americans' Pay Raises Disappear

When it appeared the threat of the COVID-19 pandemic was starting to wane, the economy opened up and wages rose as demand for workers increased. In fact, there was a record high number of jobs available, and the competitive labor market forced companies to pay more in order to attract workers. As a result, between March and June of 2021, there was a 2.8% increase in compensation.

This seems like good news. But the increase in compensation does not adjust for inflation. And despite the fact that wages are rising, inflation is outpacing wage growth. In fact, an analysis by a Harvard University economics professor revealed that, in real terms, average compensation is below what Americans were making in December of 2019 after accounting for the effects of inflation.

That means Americans' raises have disappeared due to the increased cost of goods and services. So the typical American is actually making less than they were before the COVID-19 pandemic, once inflation is taken into account.

Read on to see why Americans may not be able to keep as much money in their bank accounts due to inflation.

Rising prices mean Americans can buy less even with higher wages

Over the past year, the Consumer Price Index saw a 5.4% increase, which is the largest increase that has occurred since the middle of 2008. Just in June alone, there was a 0.9% increase in the Consumer Price Index. This index measures how prices are changing for the essential goods and services that most Americans purchase regularly.

Anyone who has made a purchase lately is likely well aware of the fact that most things cost more money now. Gas and food prices, in particular, have been soaring, and both home and rent prices have also increased dramatically. And the price of both new and used cars have hit record highs.

Wage growth, unfortunately, has not kept up with these price increases. The Employment Cost Index, which factors in both wages and workplace benefits, is 2% below the pre-pandemic trend after inflation is taken into account. (This index is a more accurate measure of how well workers are compensated for their work because it keeps the composition of the workforce consistent when collecting data.)

The Employment Cost Index fell in the most recent quarter, suggesting that the trend of price increases outpacing wage growth is continuing or even accelerating.

Americans are most likely feeling the effects in their pocketbooks. Since the cost of goods and services has increased more than wages have, people may be making more money but their salaries are buying less.

How long is this expected to last?

Both the Federal Reserve and President Joe Biden believe that this rapid inflation is a short-term trend driven by the unique circumstances surrounding the rapid reopening of the post-pandemic economy. However, it's not yet clear if inflation will be transitory or whether the steep rise will continue for an extended period of time and result in price increases becoming entrenched.

If the latter occurs, Americans will have to find ways to account for the decline in purchasing power. Careful budgeting and living within means will become crucial to avoid ending up in credit card debt or struggling to accomplish financial goals.

Top credit card wipes out interest until 2023

If you have credit card debt, transferring it to this top balance transfer card secures you a 0% intro APR into 2023! Plus, you'll pay no annual fee. Those are just a few reasons why our experts rate this card as a top pick to help get control of your debt. Read our full review for free and apply in just 2 minutes.

Read our free review

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Markets Videos

The Motley Fool

Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

Learn More