Inflation Breaks a 40 Year Record

Study Summary:

Inflation has not been so high since 1981. To make things worse, real wages for American workers decreased by 3.0%.

The Consumer Price Index set, the most popular metric for inflation, hit a new 40-year high in May 2022. The last time inflation was higher than now was in 1981 — the year the Iran hostage crisis ended and we saw the first flight of the Space Shuttle Columbia.

Annual Rate of Inflation (Consumer Price Index for all items) United States 1950 - 2022

It is now clear that inflation has become entrenched in our economy and is not the transitory phenomenon some hoped it would be. It’s likely that these figures will push the Fed to further increase rates, which could nudge GDP numbers into negative territory and place the United States in a stagflationary economy.

Higher than expected inflation growth

Anybody who thought that inflation had peaked in March 2022 was…well, very wrong.

Food prices increased by 10.1% year over year in May 2022. The same goes for the average cost of all products tracked by the CPI. But energy costs are up by 34.6% and used cars and trucks are experiencing a 16.1% inflation rate.

Real average wages drop again

The latest wages data are not helping things. May 2022 is the 14th consecutive month real average hourly earnings have decreased. The last time real wages increased was in March 2021.

12-month percent change in real hourly earnings

This may surprise you because we hear a lot about how workers’ wages are growing faster than at any point since 2001. That is true, but only if you ignore inflation.

Real average hourly earnings — that is, earnings that have been adjusted for changes in consumer prices — decreased by 3.0 percentage points (seasonally adjusted) from May 2021 to May 2022. The change in real average hourly earnings combined with a drop of 0.9%t in the average workweek resulted in a 3.9% decrease in real average weekly earnings over this period.

For more information on inflation and its effect on your wallet, check out our updated inflation study.

Key takeaways

  • Overall inflation increased by 8.6%. Food prices also increased by 10.%. Used cars and trucks are up by 16.1%, and energy costs have increased by 34.6%.
  • Real average wages dropped by 0.7% in May — the 14th month in a row inflation-adjusted wages drop.
  • Inflation will cause excess savings to run out faster, which will push more workers into the labor force and slow down the increase in wages, which is currently softening the blow of inflation.
View Article Sources
  1. Consumer Price Index 1980 – 2022 – Federal Reserve
  2. Consumer Prices by Category – BLS
  3. Consumer Price Index News Release – BLS