Power & Market

Using this Inflation Measure, Wage Growth Isn’t Keeping Up with Inflation

As we’ve noted here in the past, the Federal reserve in recent months has begun publishing its “ Underlying Inflation Gauge “ which takes into account a broader measure of inflation than the more-often used CPI measure.

When we say “inflation” in this context, of course, we mean price inflation, and not money-supply inflation. And it may prove to be a useful measure when comparing if we wish to compare price-inflation growth to wage or income growth.

After all, if incomes and wages aren’t keeping up with price growth, then it may be that the cost of living is outpacing incomes — and thus real incomes are going down.

One simple way of looking at this is simply to compare growth rates in price-inflation measures against average hourly earnings.

Using the BLS’s measure of “ Average Hourly Earnings of Production and Nonsupervisory Employees “ we can compare the year-over-year growth in earnings to the year-over-year growth in the CPI and the UIG:


In this case, we see that earnings in recent months have tended to outpace the CPI, but have not outpaced the UIG measure.

In fact, in the last 24 months, the CPI has outpaced earnings growth in only 5 months out of the 24. Thus, by t his measure, at least, it looks like real wages are growing.

However, if we compare earnings growth to the UIG measure, we find that price inflation as measured by the UIG has outpaced earnings growth in 16 out of the last 24 months.

Indeed, since 2011, the UIG has either been equal to or higher than earnings growth nearly half the time (in 42 out of 89 months).

In this graph, any time the green line is below zero, that’s a month in which UIG price inflation was higher than earnings growth:


Using this measure, we could conclude that earnings aren’t keeping up with price inflation a significant share of the time. Naturally, if wages aren’t keeping up with inflation, this would point to declining real wages.

Most of the time, however, we adjust income and wage data to the CPI only — and in that case, incomes tends to grow faster than price inflation more often.

In the last two years, we’ve finally begun to see income and wage growth climb above the old 2007-2008 peak levels. But that’s using CPI numbers. Wage growth may not stack up nearly as well if other, broader measures of price inflation are used.

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