(WJET/WFXP/YourErie.com) — The recent numbers from the Bureau of Labor Statistics (BLS) are bleaker than expected — and they already weren’t expected to be cheery.
On Friday, June 10, the BLS released inflation data for the month of May showing an 8.6% increase in the average price of all the goods we buy compared to one year ago.
“Many analysts were hoping and were expecting that the inflation rate would remain at roughly 8.3% or perhaps be even slightly lower, so it was a surprise to many analysts that it did go up by 8.6%,” said Dr. Kenneth Louie Ph.D., an economist and the director of the Economic Research Institute of Erie at Penn State Behrend.
In February, JET 24 reported an increase across all goods of 7.9% — which was dramatic at the time. For the past five or six years, inflation had held to about 2% per year.
Even the bare essentials are more expensive: the price of food items was up 10.1% (the first 12-month increase of more than 10% since 1981), energy (including gasoline) was up 34.6%, and energy services was up 16.2%. That’s causing serious pain to local families.
“One point that’s often overlooked is that when inflation is this high it hits especially hard the families who are in the lower income brackets… if you disaggregate the numbers, the inflation rates are higher in categories like food and energy — things like gasoline and electricity — and what we know is that families with lower incomes tend to spend a higher proportion of their income on those basic necessities, and as a result, they take a bigger impact when inflation is this severe,” Louie said.
People are earning higher hourly wages, but inflation has basically negated any gains employees have made in their salaries.
“The job market, if you look at that particular part of the economy, actually is a very positive picture. The unemployment rate is very low, less than 4%. The problem is that when you have prices rising at over 8%, in terms of actual purchasing power — what economists call real purchasing power — workers are actually falling behind,” Louie said. “Bottom line, workers are getting pay increases, but those are not sufficient to allow them to have higher purchasing power. Indeed, the price increases are more than offsetting those wage increases. The latest figures indicate, in real terms, workers are actually suffering a reduction in purchasing power over the last 12 months.”
While hourly compensation may have increased by 7.6% over a year ago, “real hourly compensation” is down 0.4%. So thanks to inflation, people are making less than they were before they received raises this past year. Meanwhile, workers are producing less. In the first quarter of 2022, the amount of hours worked increased by 5.4%, but labor productivity decreased by 7.3% and output decreased by 2.3%.
To sum that up, Americans are working more, but they’re making less and earning less.
People want answers. In wanting answers, they’re assigning blame. In most cases, they’re assigning blame to one category: Wage increases are leading to an increase in prices, or companies are gouging consumers to profit off of the situation. Louie says the truth is a mix of multiple causes, and that includes lingering supply problems caused by the COVID-19 pandemic and global fuel and grain issues caused by the Russian invasion of Ukraine.
“All of these global forces have converged to create a perfect storm,” Louie said.
Increased wages are contributing to inflation, Louie allowed. Given the state of the current labor market, employees are in a stronger position to demand a greater wage, he explained, and wages are part of several operating costs that impact a business’s bottom-line. And fuel price increases, energy price increases, and food price increases all impact a business’s bottom-line as well. Louie described a situation where greater wages leads to inflation which leads to greater wages which leads to inflation, and that repeats and spirals.
“What we hope we will not see is that wage-price spiral going forward,” Louie said. “There’s no indication as of now that that will happen. It remains to be seen, but it’s a fear that we have to be cognizant of.”
Louie also noted that gouging — when prices are raised, not because of demand but to take advantage of consumers — is hard to nail down.
“I have no doubt there are probably cases like that, but when economists try to analyze this, we prefer to have more systematic evidence where we can show numerically or quantitatively that yes, this is what’s happening. So far as far as I know, there is no such systematic evidence of something like price gouging,” Louie said. “What many people do point to as a piece of indirect evidence is, if you look at many of the larger multinational corporations, many of them are earning profits that are very high — in some cases unprecedentedly high — and yet those companies are still raising prices. So that to some people is indirect evidence that maybe the price increases aren’t warranted.”
Profit isn’t bad, however — when companies are profitable, there’s “spillover,” Louie noted. Retirement accounts benefit when stock markets soar, and the market is driven by profit.
“Of course we want our businesses to be profitable to succeed. That will lead to the spillover benefits to the rest of us — the question is the degree to which those price increases are justified when there are such profits, and that’s the more difficult question to answer,” Louie said.
At about 3 p.m. on June 10, the Dow was down more than 630 points and the NASDAQ was down more than 330 points.
The Federal Reserve was expected to raise the interest rate by 0.5% this month, but that could change given the latest BLS numbers. High interest rates could mean less borrowing and less spending, which could slow the rate of inflation.
“Given that high inflation, it’s expected that the Fed will continue to be aggressive in continuing to raise interest rates and slow down the economy,” Louie said.
Consumers can take action by switching stores, buying in bulk, searching for discounts, and delaying purchases.
“Consumer spending is a major driver of the overall economy,” Louie said. “As consumers adapt, as they change their behavior, that hopefully will contribute to a reduction in the long run of the rate of inflation.”
The biggest problem is that much of what is causing inflation is happening on a global scale. The United States isn’t the only place dealing with rising prices. A concerted effort by global powers could “hold the line” on prices, Louie suggested, but he also admitted that geo-politics are beyond his scope of expertise as an economist.
“We can boost the things like infrastructure and that will help to alleviate some of the supply chain issues,” he said.
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“We can get out of it, and people will get help, if the policies that are now being implemented start to work,” Louie said. “Historically, the evidence is somewhat mixed. In the 1980s, it demonstrated that we can control inflation but it came at a fairly high cost. The economy went into somewhat of a tailspin, so we essentially wrung out inflation by inducing a fairly high rate of unemployment by slowing down the economy. It’s somewhat of a tradeoff. How long does that take, and how much suffering there will be remains to be seen.”