Agreed. And that loss of purchasing power is especially tough for less fortunate people who did not have all that much to start with.
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Since most Americans live paycheck to paycheck and actually carry some debt, as long as the pay raise remains in line with the inflation, there is limited impact on purchasing power. Their debt is paid with cheaper dollars in future
Savers who leave money in the bank accounts appear to lose the most due to inflation.
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this is not true at all. The wage increases are taxable by both the feds and the state for the half of the country that pays income tax.
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That doesn’t make mathematical sense (commutativity property of the multiplication operator over integers) when talking about a % change.
Unless you happen to change marginal rate upon increase in wages (shouldn’t happen if tables follow inflation somewhat and even then it’d be pretty close), if your pre-tax salary increases by 10%, so does your post-tax salary. So you should still have 10% more money available than before to tackle expenses that have grown by 10%.
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But if you are already running a deficit, that deficit will also increase by 10%. Putting you in an even deeper hole, quicker.
Plus, a huge problem is that while workers may be able to score wage increases that match inflation, that often requires changing jobs. And lots of people are far more inclined to complain about their less-than-inflation raise, than they are to go out and find a higher salary somewhere else.
that’s not the way I see it. If my expenses increased by $10 due to inflation and my wages increase by $10 also I have to pay taxes on the $10 so all I get is $7. But my expenses are still $10 so I am $3 behind. I would have to get an increase of $14 in my wages so my take home pay increases by $10.
This is a huge math fail on your part.
The argument was about 10%, not $10. If your expenses increased by $10 and your wages increased by $10, then you either (1) don’t pay taxes in the first place or (2) your wages did not keep up with inflation:
- If you meant that in your example $10 is 10% and wages keep up with inflation, then you made $100/mo and spent $100/mo and didn’t pay any taxes, and with your $10 raise you still won’t pay any taxes.
- If you pay 30% in taxes, then you already made $142.85/mo and spend $100/mo. If both go up 10% to $157.14 and $110, you’re exactly where you started. If both go up $10, then your wages didn’t keep up with inflation. The post you replied to was about what happens if wages keep up with inflation.
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Simply put: you make $100 and your take-home is $80, and you spend $80. A 10% increase to everything puts your income at $110. And your take-home $88. And you are spending $88.
Now, if you were making $100 ($80 take-home) and spending $100, for a deficit of $20, a 10% across the board increase would leave you with a new deficit of $22. So you are now worse off, and would need to make 12% more just to cover the 10% increase in spending, and still wouldnt make a dent in your original $20 deficit. It’s the big reason why it is relatively easy to keep up, but once you fall behind, even just a little, it’s really hard to catch back up again.
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All true, but it’s not Jerome Powell’s fault anyone fell behind in the first place.
I’m just saying that Onenote’s math may have been flawed, but his conclusion still had some merit. For a lot of people, a 10% increase in wages will in fact not keep up with a 10% increase in expenses. There’s no “fault” being assigned, it’s just a basic fact of the situation.
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Why would it be harder? You’re still running the same 20% budget deficit. Sure you are $22 in the red compared to $20 before but you’re also paid $110 instead of $100. The purchasing power of $110 (and the $22 deficit) is still the same in constant dollars than it was prior to 10% increase in wages and expenses. So I just don’t follow the math of this argument.
Now the perception of being down more is basically what Summers was talking about. People take for granted that they deserved the 10% wage increase from their hard work but complain about everything costing 10% more, not realizing the increased labor costs is entirely part of that inflation.
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Percentages are what they are, but at some point you need to look at the absolute dollars involved. And saving $22/cutting $22 out of your budget is inherently harder than saving/cutting $20.
In the case of the current inflation we are experiencing, we are seeing record inflation BEFORE we see matching increased labor costs. It things other than labor that are driving this inflation. Most workers have not yet seen their wages keep up with inflation.
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I don’t see anything “inherently harder” in this. If everything went up 10%, then saving/cutting $22 after the increase is exactly as hard as cutting $20 was before the increase. If you had to stop buying a $20 pack of cigs then, you have to stop buying the same pack of cigs now, which now costs $22.
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CPI coming in hot, 0.9% for Jan alone. Market not liking it.
hearing Energy up 27%, Used cars up 40%
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Bad. Very bad.
But good for I bond owners. 
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The president had some remarks about the inflation this morning, and they sure weren’t encouraging. He mislead with some of them (understating the severity) and basically said the Fed should feel free to start a recession to get inflation under control. This was a fair summary of the nonsense -
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not true at all. my math is correct. Percentages or absolute amounts are irrelevant. The fact is that the government taxes inflation.
If you dispute that, look at the taxes on Ibonds. When you cash them in, you pay tax not only on the fixed rate interest but also on the inflation adjustment, which is supposed to compensate you for the increased price of items due to inflation.
With a 0% real rate as we have it now, when you cash them in you will not be compensated fully for the inflation while you held the bond because of the tax you pay on the inflation adjustment.
as an example, suppose you buy a $100 Ibond and hold it for five years during which inflation is one percent per year or 5% total. When you sell the bond, you will receive $105 but the government will tax the five dollars. if you pay taxes at a 30% rate, you will receive net $103.50. but due to inflation the price of items that cost $100 when you bought the bond now cost $105. So you are behind inflation.
do you claim otherwise? If so please show your math.
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The point is that you are spending the net income, not the gross. I did the math a few posts up, where you earn $100, net $80 after tax, and spend $80. A 10% increase in your gross earnings is also a 10% increase in your net earnings, which matches the 10% increase in your spending.
If you are spending the $100 gross earnings, then yes, a 10% increase will not keep up with a 10% increase in spending, due to taxes. But that’s only because your income wasnt covering your expenses to begin with.
I do not know what you mean by net and gross income. Do you claim that in my example $103.50 after tax net is more than the $105 cost of goods after inflation?