(Wealth of Geeks) — The rapidly rising rate of inflation dipped slightly last month, most obvious in the recent drop in gas prices. But it’s still on an upward trend. According to the latest report by the Census Bureau, income growth in the U.S. stayed relatively the same over the past two years. Median household income went from $69,639 in 2019 to $69,717 in 2021.
This inflation-adjusted report didn’t include data from 2020 due to pandemic-related numbers that were vastly different.
However, some states did see an increase in income since 2019, including ten states where wages rose as much as 8.5%.
Was it enough to offset the recent impact on wealth from inflation, though? Only one state can answer affirmatively.
Top Ten States With Income Increases
Overall, 24 states showed increases in median household income. These are the ten states with the highest percentage gains:
- Vermont: 8.5%
- New Hampshire: 7.1%
- Arizona: 5%
- South Dakota: 4.8%
- Montana: 4.4%
- Maine: 3.7%
- Idaho: 2.8%
- Indiana: 2.8%
- Pennsylvania: 2.5%
- North Carolina: 2%
Only One State Stayed Ahead of Inflation
Of the 24 states showing an increase in median income, all but one fell below the current inflation rate of 7.11%.
Vermont is the only state to stay ahead of the rising inflation, with an income increase of 8.5% for 2021. Median household income in that state rose from $66,766 to $72,431.
On the other hand, according to the Census Bureau’s report, household incomes in D.C. had the most significant decrease, dropping 7.9%. The median income there fell from $97,781 to $90,088. So even though D.C. remained only one of two places – along with Maryland – where the median household income tops $90,000, workers there felt the additional pressure of inflation most severely.
U.S. Inflation in 2022 Is Highest in Four Decades
The rate of inflation peaked at 9.1% for the 12 months that ended in June of 2022. This is down from the 40-year high that closed 2021 at 7%. Prior to that, the highest rate of inflation since 2000 was when 2007 ended up 4.1%.
Mirroring the U.S. economy, the U.K. also hit double digits for the first time in 40 years and is expected to climb as high as 15% in 2023. This increase affects consumers’ confidence in their spending power, contributing to the overall increased cost of living.
How Does Inflation Affect Real Wages
Even with an increase in income, for those states falling below the rate of inflation and increased cost of living, the result is, in essence, a pay cut.
The term “real wages” is used to describe a person’s income against the cost of living.
“For example, if you receive a raise at 3%, which is pretty average, and the annualized inflationary rate is 8.2%, then you personally have a loss of purchasing power of 4.9%. This means that your dollar won’t spend nearly as far. We consider this a “silent killer” when it comes to your cash flow during an inflationary period,” says Michael Acosta, CFP at Consolidated Planning.
Nathan Mueller of BlackBird Financial Planning adds, “It’s hard for folks to conceptualize this because, on paper, they are still getting paid the same amount.”
What Is Causing The Current Rise in Rates
Blaine Thiederman, CFP at Progress Wealth Management, explains inflation in simple-to-understand terms, saying, “Inflation is when there are more dollars trying to buy the same amount of goods.
“Similar to how when there are more people bidding on an auction, you’d expect the item that’s for sale to sell for more; it’s the same thing in an economy.”
Experts say the increase is partly fueled by the ongoing supply chain crisis that began during the Covid-19 pandemic and the Russo-Ukrainian War.
In turn, these issues are causing an increase in food and energy prices and a corresponding reduction in net worth. However, monetary policy is one of the main drivers for the increase in inflation.
How Does Monetary Policy Affect Inflation
When the Federal Reserve sets the interest rate too low or increases money growth too quickly, inflation increases.
The interest rate dropped to as low as zero in the first quarter of 2022, much lower than the current 8.2% inflation rate. The rapid escalation caught the Federal Reserve off guard and they’ve scrambled to try and get things back under control, so far with only moderate success.
Monetary policy set the extra-low interest rate, causing the increased inflation rate. The last time the U.S. saw a discrepancy that significant was in the 1970s.