There has been a temptation, particularly among commentators on the left, to dismiss concerns about inflation as bad faith or exaggerated by the media. Especially since Americans have enjoyed big wage hikes and generous government payments that should help with their bills.
First, there are the raw numbers: Inflation is undoubtedly up. Price growth has been stronger, and lasted longer, than most had predicted earlier this year.
In October, prices rose 6.2 percent compared with the same month a year ago, according to a Bureau of Labor Statistics report released Wednesday. This was the largest annual increase in about three decades.
Consumers are unhappy about this. Inflation — visible in higher costs of gas, groceries, housing and other common purchases — is the main reason views of the economy are so dour, even as the job market looks relatively strong.
Some pundits have suggested that recent price trends are no biggie because inflation is likely to be “transitory.” This basically means price pressures are caused by unusual, temporary circumstances (i.e., the pandemic and the reopening of the global economy); supply-chain bottlenecks will eventually unwind, and so above-trend inflation is unlikely to become “self-sustaining.”
Self-sustaining inflation, in which expectations of further inflation beget more inflation, would be very bad. Even “transitory” inflation, though, causes near-term pain and uncertainty for businesses and consumers. And people are getting impatient; the term “transitory” sounds like it means “very brief,” while painfully higher prices have persisted for months.
So how bad is that pain exactly?
Some have pointed to the hot labor market as a reason to downplay rising prices. After all, higher prices are partly driven by labor shortages; those same labor shortages are giving workers more bargaining power.
And wages are rising. But … they’re not rising quickly enough to keep pace with consumer prices.
Adjusting for the latest inflation figures, average hourly wages fell 1.2 percent from October 2020 to October 2021.
Now, these averages are not adjusted for the changes in composition of the workforce. So, if recent job growth has been dominated by lower-wage positions, that could skew the average downward.
A separate, less-frequent Bureau of Labor Statistics report on worker compensation does adjust for these compositional changes. The most recent data, from September, unfortunately also show that inflation-adjusted worker compensation is down — it’s now below pre-pandemic levels (down 0.6 percent since December 2019).
As researchers Jason Furman and Wilson Powell III noted in a post for the Peterson Institute for International Economics, normally households would have expected their wages to be rising all this time. So relative to the previous trend, the wage deficit feels even larger, closer to 2 percent.
Of course, labor-related compensation is not the only source of income Americans can receive. Congress also cut big checks to households this year, including through stimulus payments and an expanded child tax credit. Folks on the left have been frustrated that stories about higher prices sometimes ignore this extra pocket money.
I asked Furman how these additional sources of income might stack up against higher inflation. He said that if you take the payments people got earlier this year, plus inflation-adjusted wage losses, Americans on average have likely still “come out ahead.”
Imagine a two-parent, two-child family in which the parents today earn combined wages of $100,000. Inflation may have effectively wiped out about $1,000 to $2,000 of their wages over the past year (depending on which metric you use for how much real wages are down). But this family also got several thousand dollars through the expanded child tax credit ($1,000 more per child over age 6) and stimulus payments ($1,400 per family member in just the stimulus payments sent this spring).
Yet averages can hide a lot, Furman noted. Particularly since wage changes have varied by industry, and government transfers were not evenly distributed. Higher-income and childless families got less or maybe nothing from Uncle Sam, for example.
And the fact that a family received generous one-off government payments earlier this year may be cold comfort if their wages might continue falling behind inflation in the months ahead.
“We’ve had 6 percent inflation this year,” Furman said. “People usually get a 3 percent raise. Are they really expecting they’ll get a 7 percent raise instead?”
Republicans will take political advantage of this frustration. Some already have. Presidents don’t control prices, though. President Biden has limited tools available for dealing with inflation, and it seems unwise to promise his agenda will do more to reduce prices than it actually can. In any case, price stability is supposed to be the purview of the Federal Reserve; unfortunately, the Fed’s most obvious tool for tamping down inflation — raising interest rates — risks throwing the economy back into recession.
When Democrats tell voters they should stop whining about inflation, that such worries are imagined, they do themselves no favors either. They must head into the midterms with a clear-eyed view of the economy as it is, not as they wish it to be.