February 10, 2022
Center for American Prosperity
The Biden Administration’s Inflation Tax Continues to Take a Bite Out of Americans’ Paychecks
February 10, 2022
- According to just released data, the consumer price index (CPI) rose by 7.5 percent year-over-year in January, making consumer inflation the highest in forty years.
- This inflation has eroded the value of the average worker paycheck by 1.7 percent, amounting to over an $800 inflation tax since this inflationary episode started—a tax that is disproportionately borne by low-income Americans and seniors living on fixed incomes.
- In contradiction to President Biden’s promise, Americans earning under $400,000 have suffered from a large inflation-induced tax hike.
- The latest release in January of producer price index (PPI) data from December shows that small businesses continue to confront nearly double-digit producer inflation—with the PPI rising by 9.7 percent year-over-year—putting consumers at continued risk as small businesses will ultimately pass on higher costs.
- Given the Biden Administration’s AWOL response to inflation, the Federal Reserve has indicated it will have to act on its own to contain inflation by more aggressively raising interest rates. This tough medicine—made necessary by the neglect and recklessness of the Biden Administration’s fiscal policies—has already caused mortgage rates to rise by nearly a percentage point recently, adding $150/month in costs for a $300,000 mortgage.
Generally considered a “hidden tax” that families did not internalize when it was low and stable, inflation has surged with a vengeance since the Biden Administration’s American Rescue Plan Act went into effect in early 2021, exacting a steep toll on Americans’ pocketbooks. According to just released data from the Bureau of Labor Statistics shown in figure 1, the consumer price index (CPI) increased 7.5 percent year-over-year in January, meaning that consumer inflation is the highest it’s been since February 1982.
Paychecks have failed to keep pace with this rapid inflation, with the average worker experiencing a 1.7 percent cut to their real wage. This loss of purchasing power amounts to more than an $800 inflation tax, violating the Biden Administration’s false pledge to shield people earning less than $400,000 from tax hikes. In fact, contrary to progressives’ “tax the rich” class warfare rhetoric, it is low-income workers and seniors living on fixed incomes who are most under siege from inflation.
Based on the latest producer price index (PPI) data from December released last month, small businesses are also suffering under the yolk of nearly double-digit price increases, with producer inflation registering an astounding 9.7 percent year-over-year. This inflation is problematic in its own right for businesses that ordinarily operate on small margins, creating financial strain especially for small family-run businesses and local “Mom and Pop shops” that lack abundant cash reserves and readily available access to capital. This steep producer inflation is also a bad omen for the future if small businesses are forced to pass along higher costs to consumers.
The Biden Administration has gone AWOL in its response to this prolonged episode of dangerously high inflation. First, it resorted to historical musings on past inflation. After inflation proved more persistent than expected, the Biden Administration then opted to engage in tortured logic to explain why doubling down on the same policies that helped fuel inflation over the past year by flooding markets with deficit spending while simultaneously disincentivizing supply would be the antidote to that inflation. Given this void of positive fiscal policy leadership, the Federal Reserve has been jolted into taking more aggressive action on the monetary policy side, indicating in recent statements that it plans to accelerate the timetable for interest rate increases and the winding down of its balance sheet, which means higher borrowing costs for families.
This “tough medicine” would not be so necessary had Congress and the Biden Administration spent 2021 implementing fiscally sound policies that boosted the productive supply-side capacity of the economy by alleviating labor shortages and supply chain disruptions rather than stoking and neglecting them. Already, mortgage rates have risen by nearly a percentage point over the past year, with most of the increase taking place over the past few months as markets began to digest the reality that inflation was not transitory and that Federal Reserve actions to increase interest rates—rather than pro-growth fiscal policy—were going to be the only policies offered to bring inflation back under control. For Americans contemplating buying a house, not only has inflation reduced the purchasing power of their paycheck, but the surge in mortgage rates adds $150/month for a $300,000 mortgage.
The one piece of good news Americans have going for them is that the expiration of the anti-work, anti-supply-side fiscal policies from 2021 appears to be bearing fruit, with workers now returning to the labor force at a pace not seen throughout all of 2021. Whether this means the end of the labor shortage is near or not remains to be seen, but if so, it could provide relief on the inflation front as the economy shifts to accommodating demand with more production rather than price increases. The pace of the recovery will likely depend in significant part on whether tax hikes, work disincentives, and the raft of other harmful, supply crimping policies from the Build Back Better package, known also as the Big Government Socialism Bill are pushed. Americans’ paychecks and the affordability of products Americans require depend on it.
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