Skyrocketing inflation is taking a big bite out of worker paychecks

Making more money is great, but it doesn’t mean as much if you are having a harder time making ends meet.

Although wages are rising, the prices consumers must pay for goods and services are rising faster — notching a new 40-year high in February.

As a result, real inflation-adjusted average hourly earnings for the month fell 0.8%, contributing to a 2.6% decline from the year before, according to the BLS.

“Wages are up 5.1% over the past year, which is trailing the pace of inflation,” said Mark Hamrick, a senior economic analyst at Bankrate.com. “Indeed, surging prices are stealing the show on the minds of consumers.”

When wages rise at a slower pace than inflation, paychecks don’t go as far at the grocery store and at the gas pump — two areas of the budget that are getting particularly squeezed.

Household grocery bills swelled by 8.6% in the last 12 months, the largest jump since April 1981, according to the U.S. Department of Labor, while overall energy costs, including gasoline, are up the most since July 1981.

“It’s very difficult to fully evade inflation,” said Yiming Ma, an assistant finance professor at Columbia University Business School. “Certain types of spending can be postponed, but everyone needs to eat and everyone needs to go to work.”

“People do not buy food staples, gasoline or electricity because they love these things; they buy them because they need them,” Hamrick said.

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Studies show that these recent price spikes have already taken a toll.

Two-thirds of American workers say their pay is not adequate to cover the rising cost of inflation, according to a report by Credit Karma, which polled more than 2,000 adults in February.

Of the adults who have felt inflation’s impact over the past year, nearly three-quarters, or 74%, said that price hikes have hurt them financially, according to a separate report from Bankrate.com.

Roughly 64% of the U.S. population now lives paycheck to paycheck, up from 61% at the end of the last year and just shy of the high of 65% in 2020, another LendingClub report found.

How consumers adapt is going to be key in the coming months.

Mark Hamrick

Bankrate’s senior economic analyst

More people may be forced to scale back their spending, find a job that pays more, or dig deeper into their cash reserves, Hamrick said. “How consumers adapt is going to be key in the coming months.”

On the policy side, the Federal Reserve raised its federal funds rate this week to help calm skyrocketing inflation and laid the groundwork for more hikes to come.

When the Fed raises rates, borrowing becomes more expensive, thereby cooling off demand and hopefully holding down prices.

However, it will take a long time to feel the effects of these incremental moves, Hamrick said. “In terms of waiting for the Fed to do its job, that cavalry is going to be slow in arriving.”

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