During the depths of the COVID-19 recession, employees were desperately clinging to their jobs—with employers essentially holding all the power. But now, with the U.S. Economy amid one of the fastest economic recoveries on record, that power has shifted back to employees. That explains why burned-out workers—who saw their responsibilities increase during the pandemic—are quitting en masse and why there are a staggering 10.4 million U.S. Job openings. In response to this tight labor market and so-called Great Resignation, employers have no choice but to up their starting offers and dole out bigger raises.
With all that money getting tossed around, one might assume 2021 is a banner year for workers—except that isn’t exactly the case. The snag? Rising inflation is eating up workers’ paychecks faster than employers are doling out raises.
At its last reading in September, the consumer price index was up 5.4% year over year. That’s the biggest uptick since the oil shock in the summer of 2008. It’s also more than double the average rate of annual inflation (2.2%) the U.S. Has experienced this century.
This sizable uptick in inflation is, of course, eroding the purchasing power of the dollar: Anyone who hasn’t gotten a pay raise in 2021 has, in an economic sense, taken a hefty pay cut. According to the U.S. Bureau of Labor Statistics, an American earning $100,000 in January 2021 would need to earn $104,866 as of September 2021 to maintain the same purchasing power. That means workers would have needed a 4.87% raise just to keep up with inflation through the first nine months of the year. (To calculate the change in your earning power, go here.)
The problem: Most workers aren’t seeing that big of a raise. The Conference Board finds the typical raise this year is 3%. But unlike past years, that’s not enough to outpace inflation. On an inflation adjusted basis, the Bureau of Labor Statistics finds the rise in inflation—along with stimulus dollars leaving the economy—means “real wages” in 2021 are actually falling. Indeed, real average hourly earnings in June were down 1.7% year over year.
What’s going on? During the first several months of the pandemic, inflation was pretty tame. However, as the economy began to reopen this year, demand soared back—something the global supply chain wasn’t ready for. As a result, we’ve seen historic shortages in products from lumber andsteel to computer chips. But shortages alone aren’t driving this. Or at least that’s what Lawrence Summers, the former Treasury secretary under President Bill Clinton, thinks. Summers attributes some of this uptick in inflation to the $1.9 trillion economic aid bill passed in March. (That’s an assessment the White House disputes.)
But for workers seeing their purchasing power diminish, the bigger question isn’t how we got here, but will this reverse? Federal Reserve Chair Jerome Powell does call the 2021 price spike “transitory” inflation. Meaning, as supply (a.k.a. Manufacturers and the supply chain) catches back up, price hikes will slow down. But, Powell says, that doesn’t mean inflation will go negative: While commodities prices are likely to correct—like lumber has—some other hikes will be permanent.
The good news? The raises and pay bumps workers are getting this year are unlikely to recede. Once a place like Chipotle raises its average wage to $15 per hour, that’s not something that’s going to reverse. The bad news? Neither are the menu prices Chipotle hiked to pay for the pay increases.
More must-read business news and analysis from Coins2Day:
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