Inflation Eating Away at Personal Income

The top line on the latest personal income numbers might have looked pretty good initially when released by the Bureau of Economic Analysis on the morning of May 27. But once inflation was taken into account, the story changed dramatically for the worse.

In nominal terms, personal income was up by 0.4 percent in April, which followed on growth of 0.4 percent in March, 0.4 percent in February, and 1.1 percent in January. As for disposable income (i.e., personal income less personal current taxes), again in nominal terms, it grew by 0.3 percent in April, which followed on growth of 0.4 percent in March, 0.3 percent in February, and 0.4 percent in January.

But once inflation is factored in, the gains disappear.

Growth in real personal income (excluding current transfer receipts) was nonexistent in April (0.0 percent), which followed -0.1 percent in March, 0.0 percent in February, and 1.1 percent in January.

Meanwhile, growth in real disposable income came in at 0.0 percent in April, 0.0 percent in March, -0.1 percent in February, and 0.1 percent in January.

In the end, real disposable income is what matters, as that captures the dollars available for consumption, saving and investment. And for the first four months of 2011, real disposable income growth has been nonexistent. Specifically, the inflation tax, if you will, has wiped out gains in disposable income.

This is another glaring example of how inflation affects the economy, and why the Federal Reserve needs to get focused on fighting inflation, rather than trying to manipulate economic growth – which, as we see here and in most other economic data since the late summer 2008 – only makes matters worse.

By Raymond J. Keating, Chief Economist at Small Busines & Entreprenurship Council (SBEC)

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