US inflation jumped to its highest level in nearly 40 years over the past 12 months, fueling worries about the dent rising prices are putting on Americans’ salaries.
Prices rose 7.5% on the year, and 0.6% on the month in January, driven by food, electricity, and housing costs. At that pace, real wages, or wages adjusted for inflation, have been quickly dropping. But it’s harder to tell how much that’s hurting American workers.
Calculating real wages is a crass exercise that doesn’t take into account differences in what people earn or what they buy. That means economists have a very limited understanding of whether families are struggling to buy what they need—and so do the policymakers making decisions about social safety nets or inflation-fighting policies.
To understand the effects of inflation on family budgets, you have to zoom in to the household level, said Alex Williams, a research analyst at Employ America, a labor-market research and advocacy group. This can be done through survey data on families’ wages and expenses. But for now, economists don’t have easy access to that data.
How real wages are calculated
Most economists calculate real wages by subtracting the increase in annual wages of the overall population from annual increases in inflation. But this calculation tells them nothing about what people are buying and how much the price increases of those items takes out from what they’re making.
To compile the consumer price index, the Bureau of Labor Statistics (BLS) takes into account what share of households’ budgets go towards various categories—but that calculation is based on the sum of all household budgets, which obscures the vast differences between families, whether economic or otherwise.
For example, Americans who haven’t bought a used car—whose prices rose by more than 40% year-over-year—aren’t going to see 7.5% annual inflation in their entire budgets, said Claudia Sahm, director of macroeconomic research at the Jain Family Institute. Meanwhile, others who did purchase a car or other big items could have experienced even higher inflation overall.
Not knowing how different kinds of families manage their budgets means that economists can’t tell who is falling behind or coming out ahead when they talk about inflation.
Macro vs. micro indicators
The same goes for overall wages, and even broader indicators like gross domestic product. Jeff Bezos is better represented in these reports than the average American because he makes up a larger share of the overall US economy.
A narrower set of data can be found in the BLS’s consumer expenditure survey, or CES, which digs deeper into households budgets. The CES breaks out spending by five income levels, data that can be used to understand how inflation affects different kinds of families, for example, if they are poor or rich. But the BLS doesn’t take income levels into account to calculate CPI. Even if it did, it would only be able to do so once a year because the CES results are only published yearly, and with nearly a year lag. (The BLS published 2020’s CES data in September 2021.)
Better ways of measuring the effects of inflation
Instead of relying on aggregates—and assuming that all households have the same spending habits—economists could focus on savings levels by income, Williams said. If both consumer spending and savings are increasing for people in a given income level, then that means those consumers are in a position to keep buying what they need while having a better household balance sheet in the long run.
Even on the savings side, however, high-quality data split up by income level only comes out quarterly, Williams added.
The fear that some economists have going into 2022 is that without help from the government, inflation might eventually outpace the wage increases low-wage workers have been getting, Sahm added. But they have little information to confirm or discard that fear.
To get more granular data, the federal government could pay the BLS to run the consumer expenditure survey every month and publish it throughout the year, Sahm said. In most years the survey wouldn’t change, but in times of crisis, when the products people buy and their prices change, the data would help policymakers see in real time what is happening to consumers’ budgets.