Here’s What Happens When Inflation Outpaces Wage Growth

This post may contain affiliate links which may compensate us based on your interaction. Please read the disclosures for more information.

Americans haven’t saved this little since 2008. Find out what happens when everything becomes more expensive. 

The price of goods and services rose more than 8% in 2022, according to the Consumer Price Index (CPI). Stuff got expensive. But wages only grew 4%-5%, according to the Atlanta Fed wage growth tracker — overall, not enough to cover surging grocery and gas prices.

When inflation outpaces wage growth, everything gets more expensive. People can afford to buy less stuff. The cost of living goes up, and people save less. The Fed raises rates to combat inflation, making it costlier for the average person to borrow money.

Inflation cheapens cash, but stocks and housing remain valuable. From 2020 to 2022, the stock market snowballed, taking investors with it. According to St. Louis Fed data, homeowners may have benefited from inflation because their property values kept pace.

Here’s what happens when inflation outpaces wage growth, and how to stay strong financially.

You can afford less

Inflation eats into purchasing power. People spent more when the government distributed big stimulus checks, and businesses inflated prices. Now stimulus has run out, and prices are still up. This isn’t a problem when you’re getting paid more.

But when your income doesn’t keep up with inflation, you can’t afford to buy as much.

For example: Let’s say you earn $80,000 a year, and you spend 10% of that ($8,000) on food. If inflation rises by 8%, but your wages only increase by 5%, your income would be $84,000 the next year. However, your grocery bill would now be 10.2% of that ($8,640).

Over the course of the year, you would spend an extra 0.2% of your budget on groceries, reducing what you can spend on other things. When wages fall behind inflation, you can afford less.

Your cost of living rises

When inflation outpaces wage growth, the bills become harder to pay. You can cut down on discretionary expenses, but you must still pay for energy and housing. When the rent price rises 6%, but your manager only gives you a 4% raise at work, you’ve little choice but to take the hit.

Homeowners can combat this somewhat. Fixed-rate mortgages don’t suddenly become “more expensive” during inflationary periods. But it might cost more to leave the lights on or turn on the AC during hot summer months.

Your savings may shrink

During hard times, folks tend to save less money. According to Fed data, personal savings rates skyrocketed in 2020 and 2021 when people got stimulus checks. But now that stimulus has run out, savings rates have plunged to lows not seen since 2008.

That means people are saving less — storing less money in the stock market and housing. Folks may even withdraw cash from emergency savings to maintain their quality of life, disrupting long-term plans and leaving people vulnerable to unexpected price shocks.

How to stay strong financially

On average, the stock market has risen faster than inflation over the long term. The same can be said for property, which typically keeps pace with inflation. One of the best things you can do to combat inflation is to invest in stocks or property long term.

Money in savings accounts tends not to hold up as well. But bank accounts are less risky than investing in stocks. And unlike cash, savings accounts offer you some return on investment.

That said, throwing savings into the stock market isn’t always wise. The markets are volatile. If you need the money soon, you may want to keep some of it in a high-yield savings account so you don’t have to withdraw investments when the market is down and lock in losses.

Consider your situation before drawing up a savings plan. The longer you keep your money invested, the more likely your investments will beat inflation.

Alert: highest cash back card we’ve seen now has 0% intro APR until 2024

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More