America is in the throes of its worst inflation crisis in over four decades. According to the United States Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers has jumped by 8.6% over the last 12 months. This represents the highest reading achieved since December 1981.
Accordingly, that spike in inflation has raised concern among most Americans. That’s because it has continued to erode the purchasing ability of many households. MoneyTransfers.com concludes that the US’ inflation outpaced wages growth by over 3% in May ’22.
Jonathan Merry, CEO of MoneyTransfers.com, commented on the findings. “Most people are feeling the impact of inflation as the situation worsens by the day. The inflation rate is alarming, yet the salaries are static.”
Consumer prices have been spiraling for a while now. That has coincided with the Fed carrying out its most aggressive interest rate increase since 2000 in May. That increase contributed to growing concerns that inflation may be spiraling out of control.
Covid-19 and Russia-Ukraine war’s impact
One major driver of the current inflationary tendency was Covid-19. The pandemic reduced the labor force immensely and created the most significant supply-chain disruption in recent history. Businesses rely on their employees to generate revenue, so when workers are scarce, output and supply fall.
In March, consumer prices in the United States climbed the most since late 1981. This is proof of how inflation reinforces the pressure on the Federal Reserve to hike interest rates.
The impact of the Russia – Ukraine conflict
Food is a significant contributor to the increase in cost. Nonetheless, gasoline cost was the main driver of the monthly increase due to the conflict between Russia and Ukraine. As a result, the widely observed inflation index saw a jump of 1.2% over the previous month, an immense growth since 2005.
That was due to the most significant decline in used automobile prices since 1969. Nobody knew how the war would impact America’s economy. However, America is experiencing it firsthand.
Rising salaries have done little to cushion American workers
The last 14 months have been hectic for Americans. Inflation has consistently outpaced nominal wage growth. Thus, Americans can only afford very little of what they could a year ago, even with little addition in salary. Despite a 5.2% increase in average hourly wage, consumer prices shot up by 8.5%. As a result, there was a 3% drop in actual hourly earnings.
The vital need for labor, and severe hiring challenges in various industries, led to about 6% wage increases. That’s the highest pace of rising in the last 20 years. Yet, rising prices erode such gains, forcing many workers to lose purchasing power.
One of the most pressing issues facing the US economy is whether it can sustain the current nominal wage rate.
As it gets simpler for businesses to locate people in some industries, there are indicators that this increase is slowing. If this trend continues, companies’ willingness to raise salaries may slow. If this happens, inflation will have to fall sharply to prevent even more people from falling behind.
Even with the best policies in place, a recession could still occur. However, according to analysts, workers would not be without hope if such an occurrence were to happen.
Elizabeth is a financial journalist working in global markets across the world. Specialisms include personal finance and property.