This holiday season, Americans are noticing that many items, including gifts, decorations and food, are significantly more expensive than they were a year ago. The reason? Inflation.
Everyone loves the party game/icebreaker “two truths and a lie.” Can you identify which of the following is NOT true about inflation?
A. Right now, prices in the U.S. are rising at the fastest annual pace since 1982.
B. Workers’ real wages decrease during periods of rising inflation.
C. Inflation hits higher-income families harder than those with middle and lower incomes.
Let’s take these statements one at a time:
A healthy inflation rate is about 2%. Yet in November, the nation’s inflation rate reached a near 40-year high of 6.8%. Prices for particular goods have increased even more: Gas prices, for example, are up 58% from one year ago. And as Americans head to the stores to do their holiday shopping, many are alarmed by the price of holiday essentials such as wrapping paper, which climbed 7.3% in November compared to last year.
Today, wage growth is not as strong as inflation. This means that, after adjusting for inflation, workers’ average earnings decreased from November 2020 to November 2021. As a result, workers’ real wages have fallen, leaving us with less purchasing power to obtain the goods and services we need. Inflation also devalues savings and wealth and erodes retirement dollars.
While inflation is a tax on everyone, those with the lowest incomes suffer the most because they spend a larger portion of their earnings on everyday goods. While higher-income families can increase their incomes or tap into their savings to offset price increases, low-income families, especially those on a fixed budget, often do not have this option. To learn more, check out IWF’s Unicorn Fact Check on White House Chief of Staff Ron Klain ‘s recent claim that inflation is a “high-class problem.”
Bottom line: Rising inflation means shoppers may have a difficult time checking every item off their lists this season. A recent study found that this year, Americans are spending $3,500 more for normal consumption than last year. Sadly, some may even be forced to forego essential goods and services. Government policies should be aimed at slowing inflation and alleviating these disproportionate cost burdens.
For more information on inflation, read IWF’s newest policy focus.