Inflation Hitting Middle-Class RIers Like a 7% Pay Cut - Top RI Economists and Business Experts

Inflation Hitting Middle-Class RIers Like a 7% Pay Cut - Top RI Economists and Business Experts

The Biden Administration announced last week that the consumer price index hit 6.8% -- the highest level of inflation in 39 years.

For middle-class Rhode Islanders, this is a significant economic hit.

“As you know, inflation erodes an average family’s purchasing power. The actual impact will depend on the basket of goods and services a family is purchasing. For example, the increased cost of housing is a driver of inflation, but some families have mortgages and rents that are fixed,” said Michael DiBiase, the executive director of RI Public Expenditure Council.

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“For the average family making the same income and purchasing the average set of goods and services, their income would purchase about 7% less over the past year, which would be the equivalent in purchasing power to a 7% pay cut,” DiBiase said.

 

Insidious Tax Increase

For middle-class Rhode Islanders, the rapid inflation is hitting their wallet hard. Gasoline prices have been increasing nearly unabated for the past eight months - only the past two weeks has Rhode Island drivers seen prices level off.

The median price of a single-family home is now $375,000 according to the RI Association of Realtors -- a 16% increase over November of 2020.

"If not reduced, a 7% annual increase in the rate of inflation could have devastating economic consequences for many American businesses and families. It would represent a significant decrease in purchasing power and a decline in real income,” said Gary Sasse, of the Hassenfeld Institute at Bryant University.

“Inflation is the most insidious tax increase and threatens to derail any benefits that might accrue from the President’s Build Back Better social spending plan. Of course, the impact of inflation on families will depend on where and how they spend their income—shelter, energy, food, clothing, transportation, medical services, etc. However, if the 39-year high in the growth of inflation is not addressed it will represent an effective pay cut and a reduction in the standard of living for most workers," added Sasse.

 

Fed Takes Action

On Wednesday, the Federal Reserve announced a major shift in the country’s monetary policies by announcing that in 2022, the it could raise short-term interest rates up to three times. It is unclear when and how the rate hikes will impact the cost of gasoline, groceries or a new home.

“While prices are increasing prices are going faster, wages are showing improvement too, but they are not keeping up,” said Leonard Lardaro, University of Rhode Island economics professor.

And, Bryant University's Professor Edinaldo Tebaldi warns that while many workers are seeing wage increases, in most cases, the wage increases will not keep up with this level of inflation.

"Workers whose earnings are determined by a long-term contract will experience a reduction in their earnings’ purchasing power equivalent to the rate of inflation -- unless they can renegotiate their contracts," said Tebaldi.

"Those who can negotiate their pay might be able to partially recouple their earnings, but the pace of wage increase usually falls behind the rate of inflation. Workers ultimately lose with inflation," said Tebaldi.