Inflation Is Outpacing Wage Growth: Here Is What It Means

Robert Donachie | Capitol Hill and Health Care Reporter

The cost of everything from clothing to ice cream to gasoline is rising faster than U.S. workers’ wages, foreshadowing a potentially serious problem for America’s economy.

The Department of Labor released its newest version of the Consumer Price Index (CPI) Thursday morning and found that inflation on all items increased 2.9 percent from a year earlier. Average hourly earnings rose 2.7 percent over the same period, according to Bureau of Labor Statistics June data. That is, notably, 0.2 percent less than inflation rose.

What Does That Mean? 

America’s economy is heavily reliant on consumer spending, which drives over two-thirds of the U.S. economy. In the simplest definition, inflation describes the situation where prices are increasing and the purchasing power of a currency is falling.

If the gap between wage growth and inflation continues to grow, there is concern that consumers will spend less as the costs of goods and services rise. That would, in turn, dampen economic growth.

Adding to fears is the ongoing trade wars between the U.S., North American Free Trade Agreement nations, the European Union and Asian countries are threatening to curb growth. (RELATED: Economists Said America’s Economy Couldn’t Grow At This Rate)

The Labor Department found that the cost of gasoline is driving a fair amount of the increase in CPI, but it isn’t the sole reason. The cost of food (both eating at home and eating out) rose 0.2 percent in June and the costs of rent, transportation, medical care and cars went up.

Is There Something Actually To Fear? 

The president promised four percent economic growth while he was running against former Secretary of State Hillary Clinton in 2016.

The economy grew over three percent in multiple quarters in 2017, however, it has yet to reach that promised four percent mark. It is close, though.

CNBC and Moody’s Analytics constantly survey economists and ask their predictions for tracking GDP growth. The tracker pegged growth at roughly 3.8 percent on June 14, largely due to increased consumer spending. (RELATED: GDP Growth Beats Expectations)

Americans took their tax returns and proceeds from higher paychecks and went shopping in May. Retail sales spiked 0.8 percent in May and sales (minus auto sales) were up 0.9 percent.

The following month wasn’t as ideal. Consumer spending in June grew at the slowest pace in five years, matching the second quarter of 2013.

President Donald Trump has experienced an incredibly smooth ride during his first 18 months in office, dodging any real economic crisis or hiccup. If the gap between wage growth and inflation continues, the president could experience a dip in the stock market and a downturn in economic growth.

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