Personal Income and the Inflation Tax

By at 30 June, 2022, 2:52 pm

by Raymond J. Keating –

The latest personal income report from the U.S. Bureau of Economic Analysis provides another stark reminder of how brutal the inflation tax is.

The headline says that personal income grew by 0.5 percent in May. That’s great until we take inflation into account. The personal income report’s inflation measure – the personal consumption expenditures (PCE) index – came in at 0.6 percent in May. Therefore, the nominal growth in personal income turns into a real decline.

The same, of course, goes for the nominal growth of 0.5 percent in disposable income (i.e., personal income less personal current taxes) in May, which turned into a 0.1 percent decline, and the 0.2 percent growth in personal consumption expenditures, which turned into a real drop of 0.4 percent.

Our focus in this report usually is on real per capita disposable income, which takes into account both inflation and population, and tells the story on after-tax income that individuals can use to consume, save and invest. As noted in the following chart, ignoring the spikes due to government pandemic-related checks, real per capita disposable income has been on the decline since July of last year.

In fact, the May 2022 level of real per capita disposable income effectively stands at the same level as the pre-pandemic February 2020 amount.

Source: Federal Reserve Bank of St. Louis, FRED

That’s no growth in real per capita disposable income for over two years. That’s bad news for the economy, and speaks to the desperate need to get policy pointed in the right direction, namely, having the Fed rein in its loose money ways, and Congress and the White House provide pro-growth tax and regulatory relief, and advancing free trade.

The required recipe is clear. All we need are elected officials and their appointees who understand these economic realities.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.



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