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Inflation keeps eating up pay gains for workers, squeezing businesses

Liz Wilke Principal Economist, Gusto 

Inflation eats worker’s pay

A new round of inflation numbers is out, and the yearly growth in the consumer price index is a staggering 7.5%. For reference, this same measure hovered between 0-4% in the prior 10 years, and we haven’t seen these levels since 1981, forty years ago. 

Wages are up too, but “only” by 5.7% in the same period. All those extra dollars paid to workers to recruit and retain them in the wake of the great resignation hasn’t been enough to keep up with inflation eating their pay gains, driven by higher costs of housing, food, and energy. 

For businesses, this is a multifaceted challenge. Higher costs of both materials and labor are squeezing their profits, or causing them to raise prices on cost-conscious consumers seeking to minimize the impacts of higher prices on their budgets by reducing their spending or doing more comparison shopping.

Businesses and workers are feeling the inflation squeeze

To get a better sense of these impacts, we took a quick pulse survey of employers and workers in January to find out how folks are affected by continued inflation.* 

About half of workers are worried about inflationary effects, saying that they were thinking more about their spending habits or worrying about money due to inflation. A further 30% of them were actually decreasing their spending as a result of inflation. 

Businesses are feeling the effects, too. Nearly 7 in 10 business owners said inflation was affecting their business. About 40% said they had increased costs to cover the rise in inputs, and about 35% said they were absorbing the costs entirely, squeezing their profit margins. A further 16% were either limiting hours or offerings to reduce their exposure to higher prices. 

If the Federal Reserve’s interest rate hikes in the coming year can meaningfully slow inflation to more manageable levels, this will be a net positive for businesses and workers in the coming year.

*This pulse survey was conducted January 6-12, 2022, polling 84 Gusto customers (employers) and 120 Gusto members (people who work for Gusto customers).

Liz Wilke
Liz Wilke Liz Wilke is a Principal Economist at Gusto, researching the state of work and business in the modern economy. She is a veteran of both the technology and government sectors, where she directed research programs and public spending that supports dynamic, resilient companies and workers across the globe. Liz currently lives in Washington, D.C.
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