How can we help working families the most? Raising the minimum wage to $15 an hour is a popular solution, but it’s a short-sighted one given the reality that inflation — the silent assassin of Americans’ livelihoods, particularly for the poor — is now running the hottest it has in decades.
The Consumer Price Index has increased 5.4% since last year, as announced on July 13 by the U.S. Bureau of Labor Statistics. The monthly rate was 0.6% in May, but 0.9% in June. If this rate persists, our nation will experience double-digit inflation. A 0.9% monthly rate translates to an 11.4% annual rate, a level not seen since the 1970s.
Considering all the recent deficit spending by Congress and expansionary policies by the Federal Reserve, expect more of the same, or worse. In fact, according to a survey of economists in a recent issue of The Wall Street Journal, “Americans should brace themselves” because economists are waking up to the prospect of higher inflation, expecting “brisk price increases for a while.”
Economic history indicates deflation should be the norm. In fact, innovation spawns increased productivity that allows prices to fall, which should show up as deflation. We have the opposite: productivity gains with inflation. This outcome places the blame squarely on monetary and fiscal policy.
Who gets hurt the most? Those who can least afford dramatic price increases for staples like food and rent, and those whose income growth typically lags others — the poor and low-income Americans.
Consider this: The most recent mid-year consumer expenditure report from the BLS found that consumers in the lowest income quintile spend 82.2% of their income on housing, transportation, food and health care, compared with 64.4% for the highest quintile.
A 5% inflation rate would cost those in the lowest quintile an additional $1,156 for these items on their already tight budgets, averaging $28,141. A 10% inflation rate would double those costs to $2,312.
Worse, those in the lowest quintile are unable to save for their future, and inflation erodes the value of the little savings they do have. On average, those in the lowest quintile purchased only $563 in personal insurance or toward their pensions, compared with $19,736 in the highest quintile. This disparity guarantees the poor will be inadequately prepared for retirement or unforeseen loss or tragedy.
The impact of inflation was illustrated in a recent focus group session on working class families conducted by my organization, the Georgia Center for Opportunity. Our focus group consisted of working-class African-Americans who did not have a college degree and who were not employed in a managerial position or on track to achieve a management level position.
One of the women relayed her experience with financial stress up close. She was tempted to quit her job because the cost of day care was so high. She said either the minimum wage should be increased or the cost of living should be lowered. That was an incredible observation.
What Jazmine referred to is all about promoting the purchasing power of all Americans. We know that raising the minimum wage has numerous negative impacts — from reducing employment among those groups that minimum-wage laws are designed to help to running mom-and-pop small businesses out of commission in favor of big corporations (think Amazon).
The better option is for Congress to renew our nation’s purchasing power policy and get its fiscal house in order. Instead of devising new ways to spend more money we don’t have, Congress and the Biden administration should guide the federal government to live within its means and ease restrictions on economic growth. We don’t need more fiscal stimulus to fuel more inflation.
Congress can start by reinstating the actively-looking-for-work rule for those receiving unemployment benefits. Our leaders can then put a halt on other benefits that create disincentives to work and benefit cliffs, such as pandemic-related food stamps, for a public health crisis that, for all practical purposes, is gone.
At the same time, we need more production and entrepreneurial risk-taking on the supply side. The sooner we respond in ways that focus on cost-of-living changes for people like Jazmine and promote the purchasing power of all Americans, the better.
Erik Randolph is director of research for the Georgia Center for Opportunity.
