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How Inflation Is Impacting Your Paycheck: ‘The Earnings of Workers Have Eroded in Recent Months'

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As the United States continues to confront the coronavirus pandemic and related supply chain challenges, prices — and inflation — are rising.

Conventional wisdom suggests that as the costs of goods and services increase, people are able to afford fewer things with the same paycheck. Inflation is the term used to quantify the rate at which consumer buying power changes.

The Bureau of Labor Statistics estimates that between September 2020 and September 2021, the cost of goods and services that the average American buys (known as the consumer price index) increased by 5.4%. Suffice to say, many Americans did not receive a 5.4% pay raise to keep up with these rising costs.

CNBC Make It spoke with three economists about how inflation is impacting paychecks right now.

"The earnings of workers have eroded"

Rakesh Kochhar, senior researcher at Pew Research Center, stresses that "there is no single measure" of inflation or of average worker wages.

"It is the practice of the Bureau of Labor Statistics to report weekly earnings for full-time, wage and salary workers. The underlying hypothesis being that part-time workers are not fully attached to the labor force so looking at more regular, full-time workers gives you a better idea of the underlying trend in the marketplace," he tells CNBC Make It. "And the Census Bureau reports on an annual basis personal earnings for full-time year-round workers."

He points out that many part-time workers are not counted in these estimations of wage growth. He also notes that the consumer price index is an attempt to capture what the average American buys and that this may not hold true for all individuals. For instance, gas prices have risen sharply in recent months, which impacts the pockets of Americans with cars much more than those without. 

Kochhar's most recent research suggests that when adjusted for inflation, the median wage of all workers has remained relatively unchanged around $20 per hour over the past several years. 

"Consumer prices increased 1.4% from 2019 to 2020, compared with 2.3% from 2018 to 2019. This helped sustain higher earnings for workers in 2020," he writes. "However, inflation has ticked up recently, with consumer prices registering an increase of 4.8% in the second quarter of 2021 compared with the second quarter of 2020. Thus, the earnings of workers have eroded in recent months."

Prices could level off "in the next three to four months"

Josh Bivens, director of research at the Economic Policy Institute, says his preferred measure of how much Americans are earning is the Federal Reserve Bank of Atlanta's wage growth tracker, which suggests that worker wages increased by 4.2% in September — strong growth, but not enough to keep up with inflation. 

"My overall takeaway is we're seeing definitely faster than normal nominal wage growth going on right now, which is driven by a couple of obvious outlier sectors like leisure and hospitality," he tells CNBC Make It. "And yet, wages are still not getting clearly ahead of inflation, mostly because of energy prices."

Bivens says he is optimistic that energy prices, and inflation, will soon level off. 

"My strong guess is that like in the next three to four months, you'll see some of those price pressures moderate, especially the obvious one: gasoline," he says.

Pay increases could be coming

"Over the past 12 months [wages] certainly did not keep up with inflation," says Erica Groshen, senior economics advisor at the Cornell University School of Industrial and Labor Relations and former commissioner of the BLS. "The other thing that's quite true is that for about 40 years, the median real wage in the U.S. has been pretty stagnant. People earning more have had more wage increases than people who are below the median, so this widening inequality has meant that the top half of the distribution has gotten wider."

Groshen points toward the employment cost index (ECI), a BLS survey of employer payrolls that measures the change in total employee compensation, as one of the most accurate indicators for how worker wages are faring right now. 

"For the last quarter, the quarter ending in September, inflation was 1.2% and ECI was 1.4%, so actually there was a little increase in real wages for that quarter," Groshen tells CNBC Make It. "But the quarter before, the quarter that ended in June of 2021, inflation was 2.3% and the ECI was 0.8%. So there was a definite decrease in real earnings."

Fortunately, Groshen says that it is not unusual for wages to increase shortly after prices increase. 

"Generally speaking, wage inflation lags consumer price inflation," she explains. And she's hopeful that many workers will see pay increases in the near future. "Conditions are probably better than we've seen in a very long time for that to happen. Employers perceive a labor shortage. I'm not sure I would call it that but in some ways, the chickens are coming home to roost for the lack of real wage growth for this very long period of time."

Correction: This article has been updated to show that the 5.4% inflation rate represents year-over-year growth from 2020.

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