How Inflation Affects The Workers
In the simplest terms, inflation is a measurement of how costs for certain goods and services rise over a period of time–usually a year. Inflation can be used broadly as an overall indicator of price increase, or it can be measured more specifically, as for particular goods, such as food or even haircuts. Spikes in inflation can be caused by several factors, usually a sudden increase in demand for goods, or by a miscalculated increase in workers’ wage, caused by an expectation in price increase for goods or services that doesn’t materialize, making production more costly. Inflation is a complex concept, and its impact varies depending on demographics and economic status. UBS Chief Economist Paul Donovan, author of The Truth About Inflation, is quoted by the World Economic Forum saying that he believes inflation is often misunderstood. “We have this idea that there is a single inflation number which affects us all. And that just isn’t true,” he told Radio Davos. “The inflation experienced by older people tends to be higher. The inflation experienced by lower income people tends to be higher because of what they buy. Older people buy healthcare, lower income people are buying food, energy and housing in disproportionate amounts. And that gives them a higher inflation rate. So really, if you want to avoid inflation, you need to be young and rich.”
For workers–and people in general–higher inflation means lower spending power. According to the Bureau of Labor Statistics the cost of goods and services that the average American buys (the consumer price index) increased by 5.4%. The problem for the average worker is that their pay did not increase by such, or by any, percentage over the same period, making it harder to match the increased cost. The following chart from the BLS shows how earnings have eroded due to inflation.
In addition to spending power, when inflation rises, employees and potential employees have less leverage at the negotiating table when receiving job offers or asking for increased financial compensation. Research shows that, when adjusted for inflation, the average worker’s average wage has remained stagnant at about $20 an hour for the past several years.
Answer these question below based on the text.
- What is inflation based on the text?
- According to UBS Chief Economist Paul Donovan, why do older adults and lower-income individuals experience higher inflation rates compared to others?
- How does rising inflation affect the spending power and real wages of average American workers?
- In what way does inflation impact an employee’s leverage during salary negotiations or when receiving job offers?
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