Deflating numbers bring hope.
Inflation readings have been gradually drifting closer to the central bank’s 2% target. Inflation is generally defined as the continued increase in the average prices of goods and services in a given region. Following the extremely high inflation experienced in the United States since 2020, it has been a concerning topic for many Americans. The most common measure of inflation is the consumer price index which is produced by the Bureau of Labor Statistics (BLS). This index measures the average change over time in the prices paid by urban consumers for a market basket of goods and services.
Inflation and Wages
Consumer Price Index (CPI) has decreased significantly from over 9% in June 2022 to 3% in June 2024. In June of 2022, the inflation reached a shocking 9.1%. You can see the graph below highlights the surge in inflation the US has faced since 2020, making it a major concern for many Americans. The inflation peak in 2022 is the largest in the last 20 years of data from the BLS. To combat inflation, the Federal Reserve has been raising interest rates. This aims to cool the economy by making borrowing more expensive, which in turn should reduce demand and ease price pressures. However, this approach also carries risks, such as potentially slowing economic growth or even triggering a recession.
Many argue that you cannot look at inflation alone to gauge the impact on American’s buying power. Reviewing growth in wages and other income sources can reveal a more complete picture. Rising inflation rates tend to push employees to demand higher wages to offset their rising cost of living. And in 2022 wages grew by 6.7% after steadily rising since May of 2020. While rising wages can contribute to inflation, if wages don't keep pace with inflation, people's real incomes decline.
Although it's good news that inflation is steadily decreasing from its peak, it's not always clear how these economic figures directly impact people's daily lives. The crucial question is whether this recent period of high inflation is temporary or if it will become a long-term problem. The answer hinges on several factors, including how effective government policies are, whether supply chain problems improve, and the overall state of the global economy.
Sources:
https://www.statista.com/statistics/1351276/wage-growth-vs-inflation-us/
https://www.whitehouse.gov/cea/written-materials/2024/08/14/july-2024-cpi-report/
https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm