How Do Wages Compare to Inflation?

(Shutterstock)

American workers have been losing ground for more than two years. Wage increases were far below inflation. This left many either living paycheck to paycheck or on credit cards.

Although inflation is down from 2022, workers are finding themselves playing catch up with limited funds. Are wages currently keeping up with inflation? And what is in store for American workers?

Wage Increases Were Low 2021–22

Compared to inflation, the American worker saw low wage increases in 2021 and 2022. According to the Society for Human Research Management (SHRM), the median salary increase for 2021 was 3 percent.

Salary increases were lower than in pre-pandemic years. This created hardship for many workers since in 2021, inflation was running at 4.7 percent. Wage increases were not keeping pace.

In 2022, inflation only increased. Inflation rose an additional 3.3 percent in 2022 and reached 8 percent. Workers once again felt the pinch.

Wages for civilian workers increased 4.5 percent between June 2022 and June 2023, according to the Bureau of Labor Statistics (BLS). But adjusting these wages and salaries to inflation, the increase was actually 1.5 percent. Because of a slightly slow inflation slowdown in 2023, the cost-of-living adjustments (COLA) is 3.8 percent.

Although inflation has slowed down in 2023, to put the wage disparity in perspective, the Consumer Price Index (CPI) has risen 15.8 percent since the pandemic.

But how does this relate to workers’ real income?

Real Income Equals Actual Purchasing Power

Real income is an economic measure. It provides an estimation of an individual’s purchasing power in the open market. It accounts for inflation.

Real income subtracts the inflation rate per dollar from an individual’s income. This usually results in a lower value and decreased spending power.

Some people compare nominal income with wage increases and inflation. However, nominal income is not adjusted for living costs and fluctuating prices. It is best to track nominal versus real income to understand purchasing power.

A person’s real income is an estimate of purchasing power.

There are three formulas for determining real income estimates:

• Wages - (wages*inflation rate) = real income
• Wages / (1 + inflation rate) = real income
• Wages * (1 - inflation rate) = real income

Any of these formulas will give you an individual’s actual purchasing power or real income.

Real Income Formula Applied

This is an approximate calculation using $60,000.00 as the annual starting wage, then applying yearly wage increases and factoring in an annual inflation rate of 7.9 percent.

Applying any one of the real income calculation formulas over three consecutive years shows the 2023 real income is about $61,263.47. For this example, the increased percentages for the wage were applied and inflation rate remained the same over the three years. The year to June 2023 inflation rate was 15.8 percent, according to the BLS.

These are approximate numbers, but they tell the basic story.

Although on the surface it looks like the individual is starting to pull ahead of inflation, the facts speak differently.

The wage is gross and doesn’t consider higher taxes or higher insurance premiums.

For example, in the last five years, health insurance for families has increased by 20 percent. The increase for 2023 was 8 percent. This diminishes the real income.

Will Buying Power Gap Lower?

There is a gap between buying power and inflation. And at the current pace, workers may not recover their lost purchasing power until fourth quarter 2024.

Whether this recovery happens depends on the U.S. economy improving. If a recession begins, wages could plummet. This will mean that Americans will catch up much more slowly.

Inflation Costs More Than Just High Prices

The average family spends $400 more per month to purchase the same items they had in the past. And although price increases may be slowing down, the damage has been done.

The ballooned inflation prices challenged consumers’ ability to afford daily items. But the damage to their personal finances will be felt for decades. Many Americans had to dip into savings or retirement accounts to make ends meet. Forty-nine percent of Americans in a Bankrate poll said they have less or no savings compared to 2022.

Those without savings had to live on credit cards. Trying to rebuild retirement accounts, savings and paying off credit cards could take years.

To keep up with high costs, many individuals postponed contributing to retirement plans. The lack of adequate retirement funds will be felt down the road.

Some older Americans may never catch up.

Americans’ Financial Goals on Hold

Although it appears Americans’ COLAs are improving, they are still lagging behind inflation. Their overall purchasing power is still lower than it was in 2020. Because of the lower purchasing power, many financial goals have been placed on the back burner.

The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.