Inflation drives biggest pay cut for Americans in 25 years, data shows

Americans who received higher paychecks in 2022 than the year before are still seeing their dollars buy less due to rising inflation, making the increase more like a pay cut, according to new data from the Fed.

More than half (53%) of workers have seen wage growth below the rate of inflation this year, according to data from the Federal Reserve Bank of Dallas. As a result, these workers experienced a median decline in inflation-adjusted wage growth of 8.6% in the second quarter of 2022 compared to the same period last year.

“Taken together, these findings appear to be the most severe faced by salaried workers in the past 25 years,” the Dallas Fed said.

The consumer price index (CPI), a measure of inflation, rose 8.2% year-on-year in September, according to the Bureau of Labor Statistics (BLS). Food and energy prices, in particular, have risen significantly over the past year, rising 11.2% and 19.8% respectively. And this price increase has put pressure on the wallets of Americans despite a 5.1% increase in wages.

Inflation and current economic conditions have also made credit card repayments a top concern for workers, according to a recent Bank of America survey.

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Inflation-linked wage cuts at historic high

The average median drop in inflation-adjusted wages has generally been between 5.7% and 6.8% over the past 25 years, however, real wages rose 8.6% in the second quarter, according to the data.

“While the past 25 years have witnessed episodes that show either a greater incidence or greater magnitude of falling real wages, the current period is unprecedented in terms of the challenge faced by employed workers” , the Dallas Fed said.

The Federal Reserve has raised interest rates six times this year to combat high inflation and will likely continue to raise rates through 2023. This monetary policy could have a further impact on interest rates for several financial products such as credit cards.

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Americans fear inflation will get worse

Despite the Fed’s efforts to reduce inflation, about 46% of Americans said they believe it will rise even more in six months, according to the latest economic poll by The Economist and YouGov. Meanwhile, 57% said they expect interest rates to be higher in six months.

Additionally, 78% of Americans say the high rate of inflation has turned into a crisis, according to a study by real estate data firm Clever. And 40% say they think high levels of inflation will be permanent, according to the Clever study.

“No matter what (or whom) they blame for inflation, consumers remain deeply pessimistic on the issue,” the Clever report said.

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