Inflation Erodes the Average American Family’s Spending Power by $7K
In recent years, rising inflation has eroded the purchasing power of Americans because wages have not kept pace with rising prices. As the Federal Reserve raised interest rates multiple times to combat inflation, the cost of borrowing also increased. The Heritage Foundation, a conservative think tank, concluded in a December 2022 study that Americans had lost approximately $7,100 in purchasing power since Biden’s inauguration in January 2021 due to the combined effects of inflation and rising interest rates.
The study examined the Consumer Price Index (CPI) data from November 2022, which indicated an average price increase of 13.8% since January 2021. The prices of food, heating oil, health insurance, and public transportation had risen significantly. Taking into account the effects on purchasing power, the study calculated an actual annual income loss of $5,800 for the typical American family and emphasized that wages simply could not keep up.
Notably, the increase in median mortgage payments is due not only to higher interest rates, but also to higher median home prices. Since 2020, when low interest rates and the pandemic fueled an increase in demand that continues to outpace supply, home prices have been on the rise.
In addition, according to the Center on Budget and Policy Priorities, five laws passed in 2020, during President Trump’s term, provided critical COVID relief and ended the recession swiftly, but as temporary measures, they failed to resolve the hardships already experienced by American families.
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Inflation Eases in 2023, but American Households Still Struggle with Rising Costs
Based on June’s CPI data, year-to-date inflation has decreased to 3% since last year’s report. This is less than half the annual rate in November 2022 of 7.1%. Despite the decline in energy prices, inflation continues to harm Americans who pay for necessities such as food, lodging, and electricity. In May, the Biden administration proposed a plan to reduce inflation further and provide relief for essential expenditures such as housing, energy, food, prescriptions, and child care.
The positive news is that real weekly average earnings now exceed inflation. On the other hand, interest rates at a 22-year high make it prohibitively expensive for Americans to borrow money to purchase a property or pay for other essential expenses.
The July CPI data will provide insight into the direction of inflation on August 12. The Nowcast from the Federal Reserve Bank of Cleveland projected a higher annual inflation rate of 3.42 percent for July 2023. When the Fed meets in September, persistent inflation concerns may result in yet another interest rate increase.
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Source: Yahoo Finance
