Working Americans are feeling ‘purchasing power of wages’ waning, economist

American workers are staying on their toes following a week of aggressive rate hikes and negative real GDP, stirring debates about whether the U.S. has entered a technical recession.

Alan Blinder, Princeton University professor of economics and public affairs, explained inflation’s impact on sustainable wage growth and the Federal Reserve’s response to macroeconomic conditions.

“I think middle class Americans are feeling the inflation. Wages are going up at more rapid rates in recent years, but they’re not keeping up with inflation, so the real purchasing power of wages is falling, and working Americans feel that,” Blinder told Yahoo Finance Live.

Americans are collecting more in paychecks than previous years, but the inflation rate is outpacing wage inflation. The Employment Cost Index from the U.S. Bureau of Labor Statistics showed wages rising 5.3% on a year-over-year (YoY) basis in June 2022. However, July’s Personal Consumption Expenditures (PCE) price index reflected a 6.3% YoY increase in goods and services.

Focus is on the Federal Reserve's attempts to steer the economy back on course. On Wednesday, the board of governors voted unanimously to raise the federal funds rate by 75 basis points in efforts to curb inflation. Blinder, former Vice Chair of the Fed, cautions that it will take some time to see monetary policy have an impact.

“I must say Fed people are much more patient than market people are, but they’re not going to have the effect they want on inflation for a while. They have to view it as they put something in the pipeline, and it takes a while to come out the other hand,” Blinder said.

Blinder also thinks the Fed’s expeditious actions are working, pointing to the housing market.

“Every indicator of housing, from traffic through realtors to housing stats to new sales and resales, everything is down on the housing front, which is where you expect the Fed to have its biggest effect,” Blinder added.

Home sales fell 8.6% in June 2022 as prices soared 80%, according to the National Association of Realtors (NAR). NAR Chief Economist Lawrence Yun projects home sales will continue to decline later in the year, and pick up in early 2023 as mortgage rates stabilize.

Blinder anticipates the Fed will slow down its aggressive rate hikes after July’s FOMC meeting.

“Based on early popular forecasts, my guess would be that the Fed does another 50 basis points in September and then steps back to look at its handiwork. So it might stop there or pause there for a while and see what happens, or it might just ratchet down to 25 basis points,” Blinder said.

Investors are betting the Fed cuts back on hiking interest rates. The Market Probability Tracker from the Federal Reserve Bank of Atlanta forecasts a path of lower interest rates post-2023.

Yaseen Shah is a writer at Yahoo Finance. Follow him on Twitter @yaseennshah22

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