Here’s what the Fed rate hike means for your salary

Every time inflation ticks up, it takes a bite out of workers’ pay and chews away at their bank accounts. And this current stretch of inflation — triggered by a confluence of events, including the war in Ukraine and the ongoing pandemic — has had a voracious appetite.

That has meant wage hikes have actually turned into losses, with the latest inflation report showing consumer prices shot up by 8.6% for the year ending in May. As a result, the average consumer is having to cough up an estimated $460 more every month than they did at this time last year to pay for the same goods and services, according to Moody’s Analytics. Additionally, research from the University of Michigan found that real disposable income per capita is on track to show the greatest yearly decline since 1932.

Making matters worse for US workers is the Federal Reserve, which has embarked on a rate-hiking campaign aimed at not only taming inflation but wage growth, too.

“When the Fed meets and makes its policy decision, most people are not getting that what the Fed is saying is ‘you are making too much money, your wages are rising too fast, and we need to slow the demand for labor, and we need to slow wage increases,'” said William Spriggs, an economics professor at Howard University in Washington, D.C., and chief economist for the AFL-CIO labor union.

But wage growth is not, to a material degree, driving inflation, said Mark Zandi, chief economist at Moody’s Analytics.

“The causality is running from inflation to wages, not from wages to inflation,” he said.

Instead, the main drivers of today’s price increases are actually a series of extreme supply shocks, including failures in the global supply chain and the war in Ukraine, Spriggs said.

“You cannot simply remove major wheat production, major food oil production, major fertilizer production, major oil production, major natural gas production, major production of [semiconductor] chips used in automobiles and think you’re not going to get inflation,” he said. “When it gets presented in the American news, you get this idea that if our stimulus checks had been lower, and if our wages had gone lower, that we wouldn’t have this inflation. Nobody in the world accepts that as the viewpoint.”

Paychecks won’t stretch as far

America may not technically be in a recession — but to many folks, it sure is beginning to feel like one.

“When you begin to look at that data, you begin to think that maybe the people who are really distressed are correct; that the situation is much more economically dire than the data that economists normally look at,” said Donald Grimes, a University of Michigan economist who has conducted research into real after-tax income trends.

Nominal wages for full-time workers are up by an average of about 5% over the 12 months ended in May 2022, according to the Federal Reserve Bank of Atlanta’s Wage Growth Tracker. The tight labor market, a renewed movement to bolster workers’ rights, and efforts by states and some major employers to ratchet up minimum wages have all helped contribute to meaningful wage growth during the past year.