CPI Report: Positive Real Wage Gains Reduce Chance of Downturn
CPI Report: Positive Real Wage Gains Reduce Chance of Downturn
CPI Inflation declined to 2.5% over the year, the lowest level since February 2021, after the index increased 0.2% month-on-month. Meanwhile, average hourly earnings rose at a significantly faster clip of 3.8%, putting real wage growth over the year at 1.3%.
The August CPI report marks the 16th month of positive real annual wage gains (the green wedge in the chart below), following 25 months of declines (the orange wedge). Positive wage gains are expanding Americans’ purchasing power and fueling rock-steady growth in real consumer spending. The sustained strength of U.S. consumer spending has fueled overall economic growth and boosted the labor market, despite the drag on the economy of interest rates being at a two-decade high.
Cumulatively, consumer prices have now risen 21.2% since the start of the pandemic, while average wages have grown 23.3% overall, and 26.1% for non-managers. Between around 2013 and 2019, U.S. workers became accustomed to real wage gains of about 1.2%-1.4% per year. Real wage growth has taken place at a similar rate for non-managers since the pandemic, but at about half that pace overall.
There has been considerable variation in wage growth rates across industries since the pandemic, however. Average hourly earnings have grown 31.2% in leisure and hospitality, partly due to the need for employers to compete more aggressively to recruit and retain workers in low-wage, in-person roles, and partly due to new minimum wage laws in many cities. Workers in the information sector, however, have only seen their wages rise 16.8%, on average.
Of course, households don’t only experience different rates of wage growth, but also different rates of inflation, depending on the particular bundle of goods and services its members consume. Workers with lengthy commutes and Americans who live in areas where the air conditioning needs to be on constantly in the summer, and the heating on in winter, have seen their costs grow more quickly. Energy costs are up 29.4% since the pandemic, and transportation costs are up 27.3%. Lower-income families who spend a larger share of their budget on housing and food have also seen their expenses rise faster than overall inflation.
Fortunately, inflation has not only slowed but also narrowed over the past year, with prices of most categories of goods and services growing at a more moderate rate recently.
Housing costs accounted for more than 70 percent of the overall increase in the price level in August. But the measured increase largely reflects the quirky way U.S. statistical agencies measure housing prices. The CPI measures housing costs primarily through Rent of Primary Residence or Owners’ Equivalent Rent (OER). These components reflect the cost of renting or the equivalent cost of owning a home, rather than tracking actual home prices, which have grown far more slowly.
That said, for most U.S. households, the cost of owning a home doesn’t only reflect the list price but also the cost of obtaining a mortgage, and financing costs have skyrocketed since the Federal Reserve started raising interest rates.
The national housing affordability index is currently well below 100, which means that a family with the median income cannot qualify for a mortgage to buy the median-priced home.
Take a tour of the latest data on inflation through ZipRecruiter charts.
