Minimum Wage Vs. Inflation Rates

by Cheryl Hosmer

Minimum wage is related to the inflation rate, but they are two separate things. Consider this scenario. If you give employees, who also are consumers, more wages to spend on goods and services, that creates demand. More demand translates into companies paying higher wages and payroll taxes when they hire people to meet that demand. However, companies may not be able to afford to meet supply needs over time, and prices may rise when demand runs ahead of supply. That's inflation, and when the cost of living goes up, it affects a consumer's quality of life.

The Inbalance of Wages and Inflation

Minimum wage is determined both by the U.S. Congress and your state's legislature. Minimum wage was enacted in 1938 through the Fair Labor Standards Act to counteract the fallout of the Great Depression and was designed to help create consistency in consumer buying levels by giving them a baseline of income. Historically, minimum wage has not kept pace with the rate of inflation. The federal minimum wage has been $7.25 per hour since 2009.

Consumer Price Index Tie-In

Supply and demand in a world interconnected by commerce creates volatile markets, especially regarding food and energy commodities. The U.S. Consumer Price Index, or CPI, measures the nation's supply and demand correlation, creating a formula for inflation over time. This weighted formula utilizes categories such as housing, transportation, food, entertainment, medical care, education and apparel. If minimum wage, and wages in general, don't keep pace with the markets, consumers have to choose what they feel that they can buy. The expenditures are plugged into the categorical formulas and added together and multiplied by a special category called "other," which represents such things such as refuse collection and "other" miscellaneous expenses. The Bureau of Labor Statistics reports the percentages each month on a fixed schedule.

Cost of Living

The CPI is also known as the Cost of Living index. There are many cost-of-living calculators on the Internet. These comparative calculators show how much living in one city compares to another, how much value money has increased or decreased over a set amount of years, even how much a loaf of bread cost nows and in 1955. You can calculate your "Living Wage" based on minimum wage. All calculations are estimates due to fluctuations in benchmarks represented by those creating the calculators. They are useful if you are relocating or just want to reminisce about 29 cent per gallon gasoline.

The Comparative Future

It's uncertain how minimum wage will continue to tie in to inflation rates in the future. Only 10 states have indexed their minimum wage to the CPI. The Economic Policy Institute says that raising the minimum wage to $10.10 per hour would give a boost to families and the nation, helping to level income across the board, but states would have to comply. Raising the minimum wage historically has had little direct effect on the rate of inflation, but eliminating minimum wage disparity across the states, creating a uniform wage increase, might level the playing field, according to the Economic Policy Institute.

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