Rising prices on everything from groceries to gasoline have eaten away the wage gains workers have seen since the start of the year, leaving most Americans earning less than they were before the pandemic began and derailing the White House’s argument that paychecks have grown under President Joe Biden’s tenure.
Prices climbed 0.5 percent over the month from June to July, a slower pace than in recent months but still sizable enough that it outpaced the healthy wage gains workers across the income spectrum have received. As a result, real earnings decreased 0.1 percent over the month, government data shows.
The consumer price index, a key measure of inflation, rose 5.4 percent in July from the same month last year as the cost of meat and dairy products, hotel room stays, restaurant dinners and other items increased, according to Labor Department data released Wednesday. It's the second straight month of year-over-year increases at that level, the biggest jump since 2008.
The data marks the latest month in which rising prices have overshadowed wage gains, all but erasing the impact of pay hikes that have been celebrated from Biden on down as a sign of workers’ new bargaining power and of the robustness of the economic recovery.
It’s part of a larger pattern, too: Even as compensation rose at a 2.8 percent annual rate in the three months ending in June, prices rose faster — leaving compensation lower than it was in December 2019 once it’s adjusted for inflation, according to a recent analysis by Jason Furman, who served as a top economic adviser in the Obama administration.
“It means that households are falling behind,” Furman, now a professor at Harvard, said in an interview. “When you have a hot economy, you get faster wage growth and you get faster price growth. And right now, the price growth is winning the race.”
The latest monthly numbers come amid fears of spiraling inflation, and as the White House has sought to tamp down concerns about its staying power.
Economists were quick to point out on Wednesday that some of the sectors that had seen the most dramatic price hikes — used cars and trucks in particular — slowed substantially in July, bolstering the view that much of the rise is likely to be transitory and prompting some to forecast that inflation has reached its peak. And the White House noted that neither headline nor core inflation accelerated in July, a change from previous months.
“One month does not make a trend,” the White House Council of Economic Advisers posted on Twitter. “And we know supply constraints persist in various sectors. However, July’s deceleration is encouraging.”
Still, the data shows that inflation, at least for now, is having the greater effect on families’ bottom lines, and it remains to be seen how long the situation will linger. Furman found that in June, real compensation was 0.7 percent below December 2019 levels and 2 percent below its pre-pandemic trend.
Biden administration officials have consistently argued that inflationary pressures will subside once Covid-induced supply issues are resolved. They note it’s mostly areas of discretionary spending that have been affected, meaning most families can avoid paying higher prices if they’re not buying used cars or looking to travel.
At the same time, officials have regularly celebrated the gains in worker pay, noting each month that wages are going up: The White House press office blasted out a news story this week reporting that average wages in restaurants and supermarkets had risen above $15 per hour for the first time.
For now, Biden officials are more focused on getting people back to work than they are on the wage dynamics, people familiar with their thinking say. But they have been closely watching the inflation data, which risks becoming not just an economic vulnerability but a political one. Two in five voters viewed Biden’s economic policies as “very responsible” for inflation, double the proportion who blamed the return to normal life as the root cause, according to a Morning Consult poll from late last month.
“They’re very nervous,” Josh Bivens, director of research at the left-leaning Economic Policy Institute, said of the White House. “On many fronts, they would see the recovery as going pretty well. And this is the one sort of chink in the armor.”
The White House did not immediately respond to a request for comment on Wednesday.
Republicans have seized on inflation data to criticize Biden’s economic agenda and to vote against additional spending, arguing that the fiscal response so far is to blame for the jump in inflation. Sen. Rick Scott (R-Fla.), who chairs Senate Republicans’ campaign arm, tweeted on Wednesday that “higher wages will never catch up to government-induced inflation.”
And Rep. Kevin Brady of Texas, the top Republican on the House Ways and Means Committee, said Biden and congressional Democrats are to blame for short-term inflation caused by generous federal spending. He said he sees a risk of long-term inflation if labor shortages that some businesses have reported persist.
“It seems like a devil’s triangle of bad policies that are driving up inflation,” Brady said in an interview. “I think the president’s in denial about how much this worries families.”
It’s a concern shared by some across the aisle as well. Sen. Joe Manchin (D-W.Va.), whose vote Democrats will need to pass their multi-trillion-dollar reconciliation plan, raised concerns on Wednesday over rising inflation rates, which he called “an unavoidable tax on the wages and income of every American.”
Economists are split on where inflation will go from here: whether it has peaked or not, whether it is all due to reopening challenges or longer-term struggles, and whether wages will be able to catch up.
But for now, “workers are largely treading water,” said Jay Shambaugh, an economics professor at George Washington University and a former member of the Council of Economic Advisers under Obama.
“The big question for policy is how temporary is it,” he continued. “If the wage gains sustain but the price spike is more temporary … I think that’s the world people are hoping for, where you’ve gotten pretty substantial real wage gains over time. We’re still in the middle of seeing how it plays out.”
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