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Yahoo Finance Plus The Average American Family Has Lost $7K in Spending Power, Thanks to Inflation
Over the last few years, rising inflation has hurt Americans’ purchasing power because wages usually couldn’t keep up with the prices. As the Federal Reserve increased interest rates several times to target inflation, borrowing also became more expensive. Considering the combined effects of inflation and rising rates, a December 2022 study from The Heritage Foundation, a conservative think tank, determined that Americans had lost around $7,100 in spending power since Biden’s inauguration in January 2021.
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The study looked at the November 2022 Consumer Price Index (CPI) data that indicated an average 13.8% increase in prices since January 2021. Prices for food items, heating oil, health insurance and public transportation had particularly risen. Considering the effects on purchasing power, the study calculated a real annual income loss of $5,800 for the average American family and emphasized that wages just couldn’t keep up.
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When examining interest rates, the study estimated another $1,300 loss of spending power. The increase is particularly troubling for prospective homebuyers. E.J. Antoni, a Heritage Foundation research fellow, wrote, “The monthly mortgage payment on a median priced home is up 84%, or $820, since Biden became president.” “That’s about $10,000 more per year and $300,000 more over 30 years for the same house,” he explained.
It should be noted that the increase in median mortgage payments is a result not only of higher interest rates, but of higher median home prices as well. Home prices have been on the rise since 2020, when low rates and the pandemic spurred a surge in demand that continues to outpace supply.
What’s more, five bills enacted in 2020, during President Trump’s term, provided vital COVID relief and put a quick end to a recession, but as temporary measures, they failed to address the hardship American families were already experiencing, according to the Center on Budget and Policy Priorities.
However, Antoni cited the Biden Administration’s policies as the driver for lost spending power. And when considering falling prices for certain categories, he attributed them to a decline in demand due to unaffordability instead of an increased supply.
Since the report came out last year, the year-to-date inflation has fallen to 3% based on June’s CPI data. This is less than half of November 2022’s 7.1% annual rate. But while energy costs have declined, inflation still hurts Americans paying for essentials such as food, housing and electricity. The Biden administration proposed a plan in May to further reduce inflation and offer relief for important costs such as housing, energy, food, prescriptions and child care.
Some good news is that real average weekly earnings are now beating inflation. On the other hand, interest rates at a 22-year high are making it very expensive for the Americans who want to borrow money to buy a home or cover other important costs.
On August 12, the July CPI data will provide insight into where inflation is heading. The Federal Reserve Bank of Cleveland’s Nowcast predicted a higher annual inflation rate of 3.42% for July 2023. Continuing inflation issues could lead to yet another interest rate hike when the Fed meets in September.
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