The high-octane, stimulus-fueled economic rebound, combined with the “Great Resignation” labor crunch, has forced U.S. employers to lift wages sharply to attract and retain staff. But while January’s over-the-year wage gains are positive in nominal terms, they disappoint in real terms, as the red-hot pace of inflation means that many U.S. workers effectively took a pay cut.
U.S. workers are sure to see the earnings bump as a welcome development and as confirmation of a boost in their bargaining power. Yet, surging prices have more than erased those gains, pushing inflation-adjusted earnings, or real wages, into negative territory and actually reducing many households’ purchasing power.
What’s more, when combining the real hourly wage decline with a 1.4 percent drop in the average workweek, real average weekly earnings over the same period fell by 3.1 percent. In the year through December 2021, real average weekly earnings fell by 2.0 percent.
Still, there was a glimmer of hope in the BLS earnings data for those U.S. workers whose wages have made gains on paper, but saw cuts in real terms. On a monthly basis, from December 2021 to January, real wages managed to eke out a 0.1 percent gain. The positive balance was driven by a 0.7 percent increase in earnings and a slightly smaller 0.6 percent pace of month-over-month inflation. In December 2021, real hourly earnings were flat, and in November 2021, they declined by 0.4 percent.
President Joe Biden, who said on Feb. 10 that rising inflation was creating “stress at the kitchen table,” touted January’s monthly wage boost.
Biden noted that his administration would do all it could to “win this fight” against surging prices, singling out such measures as shoring up domestic supply chains, pushing for cheaper prescription drugs, and promoting more market competition.
Accelerating prices and further firming in the labor market have prompted the Fed to signal readiness to pick up the pace of tightening its loose monetary settings. St. Louis Federal Reserve President James Bullard said the Feb. 10 hotter-than-expected 7.5 percent inflation print made him “dramatically” more hawkish. He now wants a full percentage point of rate hikes over the next three Fed policy meetings.
The inflation data has also prompted a number of analysts to raise their forecasts for the overall number of Fed rate hikes in 2022.
Bank of America analysts also see seven quarter-percentage-point hikes in 2022, while predicting another four in 2023.