(WJET/WFXP/YourErie.com) – Recent numbers from the Bureau of Labor Statistics (BLS) are bleaker than expected – and they weren’t expected to be cheerful.
On Friday, June 10, the BLS released inflation data for the month of May showing an 8.6% increase in the average price of all the goods we buy compared to a year ago.
“Many analysts were hoping and expecting the inflation rate to stay around 8.3% or maybe even slightly lower, so it’s a surprise to many analysts that it went up 8, 6%,” said Dr. Kenneth Louie Ph.D., economist and director of the Erie Institute for Economic Research at Penn State Behrend.
In February, JET 24 reported a 7.9% increase for all properties, which was spectacular at the time. For the past five or six years, inflation has remained at around 2% per year.
Even basic necessities are more expensive: the price of food increased by 10.1% (the first increase of more than 10% over 12 months since 1981), energy (including gasoline) increased by 34.6% and energy services increased by 16.2%. . This causes severe suffering to local families.
“One point that is often overlooked is that when inflation is this high, it hits families in the lower income brackets particularly hard…if you break the numbers down, inflation rates are higher in categories like food and energy – things like gasoline and electricity – and what we do know is that low-income families tend to spend a higher proportion of their income on these basic necessities, and therefore they have a greater impact when inflation is this severe,” Louie said.
People are earning higher hourly wages, but inflation has pretty much wiped out any gains employees have made in their wages.
“The labor market, if you look at that particular part of the economy, is actually a very positive picture. The unemployment rate is very low, less than 4%. The problem is that when prices rise more than 8%, in terms of real purchasing power — what economists call real purchasing power — workers actually lag behind,” Louie said. “At the end of the day, workers benefit from wage increases, but these are not sufficient to allow them to have greater purchasing power. Indeed, price increases more than offset these wage increases. The latest figures indicate, in real terms, that workers are in fact experiencing a reduction in their purchasing power over the past 12 months.
While hourly compensation would have increased by 7.6% over one year, “real hourly compensation” fell by 0.4%. So, thanks to inflation, people are earning less than they were earning before they received raises last year. Meanwhile, workers produce less. In the first quarter of 2022, the number of hours worked increased by 5.4%, but labor productivity fell by 7.3% and production fell by 2.3%.
To sum up, Americans work more, but earn less and earn less.
People want answers. In wanting answers, they assign blame. In most cases, they assign blame to one category: wage increases lead to higher prices, or companies gouge consumers to take advantage of the situation. Louie says the truth is a mix of multiple causes, and that includes ongoing supply issues caused by the COVID-19 pandemic and global fuel and grain issues caused by the Russian invasion of Ukraine.
“All of these global forces converged to create a perfect storm,” Louie said.
Rising wages contribute to inflation, Louie admitted. Given the current state of the labor market, employees are in a better position to demand higher pay, he explained, and wages are among several operating costs that impact business results. ‘a company. And increases in fuel prices, energy prices, and food prices also impact a company’s bottom line. Louie described a situation where higher wages lead to inflation which leads to higher wages which leads to inflation, and it repeats and spirals.
“What we hope not to see is this wage-price spiral in the future,” Louie said. “There is no indication at this time that this will happen. That remains to be seen, but it’s a fear we need to be aware of.
Louie also noted that the scam — when prices rise, not because of demand but to take advantage of consumers — is hard to pin down.
“I have no doubt that there are probably cases like that, but when economists try to analyze that, we prefer to have more systematic evidence where we can show numerically or quantitatively that yes, that’s what is happening. As far as I know, there’s no such systematic evidence of something like price going up,” Louie said. “What a lot of people refer to as circumstantial evidence is that if you look at a lot of large multinational corporations, many of them making very high profits – in some cases, unprecedented – and yet these companies continue to raise prices. So, for some people, this is circumstantial evidence that the price increases may not be justified.
Profit isn’t bad, though — when businesses are profitable, there are “spillovers,” Louie noted. Retirement accounts profit when stock markets are soaring and the market is profit driven.
“Of course, we want our businesses to be profitable in order to be successful. This will lead to beneficial spillovers for the rest of us – the question is how justified are these price increases when there are such benefits, and that is the hardest question to answer,” Louie said.
By 3 p.m. on June 10, the Dow was down more than 630 points and the NASDAQ was down more than 330 points.
The Federal Reserve was expected to raise the interest rate by 0.5% this month, but that could change given the latest numbers from the BLS. High interest rates could mean less borrowing and less spending, which could slow the rate of inflation.
“Given this elevated inflation, the Fed is expected to continue to be aggressive in continuing to raise interest rates and slow the economy,” Louie said.
Consumers can take action by switching stores, buying in bulk, seeking discounts and delaying purchases.
“Consumer spending is a major driver of the overall economy,” Louie said. “As consumers adapt, as they change their behavior, this will hopefully contribute to a long-term reduction in the rate of inflation.”
The bigger problem is that much of what causes inflation happens globally. The United States is not the only place facing rising prices. A concerted effort by world powers could “hold the line” on prices, Louie suggested, but he also admitted geopolitics is beyond his area of expertise as an economist.
“We can strengthen things like infrastructure and that will help alleviate some of the supply chain issues,” he said.
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“We can get through this, and people will get help, if the policies that are being implemented now start working,” Louie said. “Historically, the evidence is somewhat mixed. In the 1980s, he demonstrated that inflation can be controlled, but it was quite expensive. The economy sort of collapsed, so we basically eliminated inflation by inducing a fairly high unemployment rate by slowing down the economy. It’s a bit of a compromise. How long it will take and how much suffering there will be remains to be seen.