Business
Inflation has taken away all the wage gains for workers and then some
- Real average hourly earnings when accounting for inflation, actually decreased 0.5% for the month. A 0.9% inflation increase negated a 0.4% rise in wages.
- Consumer confidence has been sliding despite the rising wages, which are up nearly 5% nominally year over year but have declined 1.2% in real terms.
- The Fed finds itself under increasing pressure to adjust policy accordingly.
What looked like a big jump in workers’ wages during October turned into just another gut punch after accounting for inflation.
The Labor Department reported Friday that average hourly earnings increased 0.4% in October, about in line with estimates. That was the good news.
However, the department reported Wednesday that top-line inflation for the month increased 0.9%, far more than what had been expected. That was the bad news – very bad news, in fact.
That’s because it meant that all told, real average hourly earnings when accounting for inflation, actually decreased 0.5% for the month. So an apparent solid paycheck increase actually turned into a decrease, and another setback for workers still struggling to shake off the effects of the Covid pandemic.
“For now, inflation is going to continue to run above very solid wage growth,” said Joseph LaVorgna, chief economist for the Americas at Natixis and former chief economist for the National Economic Council during the Trump administration. “This is why when you look at consumer confidence, it’s really taking a beating. Households do not like the inflation story, and rightly so.”
Indeed, while consumer confidence leaped higher from the lows of the pandemic around April 2020 for a solid year after, it has come down substantially since, coinciding with the rise of inflation to its highest pace in more than 30 years. The University of Michigan’s closely watched index of consumer sentiment for August slumped to around its lowest level in nearly a decade.
Wages, though, have swelled during the period, with average hourly earnings up 4.9% year over year in October. However, compared with inflation, real hourly wages actually have declined more than 1.2% during the same time frame, according to the Labor Department.
Real weekly earnings have been even worse, dropping 1.6% during the period when accounting for the 0.3% decrease in the average workweek.
Consumers have responded by ramping up their inflation expectations, which historically have been tied closely to gasoline prices. Costs at the pump have swelled 49.6% over the past 12 months, the Labor Department reported in Wednesday’s consumer price index reading.
The New York Federal Reserve’s most recent survey of inflation expectations, released Monday, indicated that consumers expect inflation to run at a 5.7% pace over a one-year horizon, the highest ever for a data set that goes back to June 2013.
“That means there is a potential structural break in inflation expectations,” LaVorgna said. “Unless there is a collapse in growth where you have a recession, we could be entering a new inflation regime.”