The 5. That price shock wouldn't hit someone's wallet unless they bought a used car. That extra cost would be borne by drivers, though perhaps not city residents who ride public transit. By comparison, food prices are up just 2. The consumer price index also doesn't account for shifts in the behavior of consumers, who may change what they buy to avoid these higher costs. For example, one might switch to chicken from beef to save money, or delay buying a car until prices fall.
The personal consumption expenditures price index, another measure of inflation, accounts for these shifts. The Bureau of Economic Analysis hasn't yet issued the figure for June. But in May, the PCE index was 1. However, these shifts still impose a cost on consumers, if not an explicit one, according to Casey Mulligan, an economics professor at the University of Chicago.
There's also reason to be wary of overinterpreting inflation and wage figures as the U. That's due to economic distortions caused by the virus. For example, consumer prices fell early in the pandemic. Comparing prices today to lower prices a year ago will naturally cause inflation readings to seem high. Similarly, wage data may be skewed by a disproportionate number of layoffs among low-wage workers during the pandemic. This concept is too broad when evaluating wage trends, given that most health care spending flows through insurance rather than out-of-pocket spending.
Chained CPI does account for this but is only available back to Analyses using the PCE generally indicate significant wage growth. Reeves and Christopher Pulliam Wednesday, April 17, The choice of deflator is not trivial. Since extra points for those of you who spotted the decision to select that earlier date , hourly median earnings have risen by just three percent using the CPI-U-RS, but by 15 percent using the PCE:.
Another big factor is gender. Women have seen a wage increase of 25 percent since , reflecting increased educational attainment: in the spirit of this paper, we must report of course that this is median wages, adjusted using CPI-U-RS, since The declines have been steeper for Black and Hispanic men. It is important to note in passing that the gender pay gap is shrinking at the median in part because men are earning less than before.
What this means is that the gloomiest stories about wages tend to be those focused on men rather than women, or even all workers—who have seen a wage increase of three percent since Workers at different points in the distribution may see very different trends. It therefore matters a great deal whose wages are tracked.
The worst picture over recent decades has usually been found in the middle of the distribution. Many analyses of the wages of median workers , for example, find a trend line that has barely budged over time. A more upbeat story can be told by looking at the tails rather than the middle. Wages at the top of the distribution have been rising rapidly , especially for women.
It hardly needs saying that the selection of average or median is therefore consequential, too. But the story for wages at the 20 th percentile is twice as good, with a rise of six percent:.
Just by varying the four decisions outlined here, 24 different wage time trends can be constructed. If we begin in , use PCE, include women and men, and look at the 20 th percentile of wages, we can report that wages grew at a cumulative rate of 23 percent—corresponding to an annual increase of less than one percent.
The White House was quick to hype strong wage gains in May, without the caveat that these were nominal, not real, gains. While we will not know the May inflation numbers until Thursday, June 10, high producer and import price inflation in April suggest consumer price inflation likely remained historically elevated in May.
Indeed, with just 0. While it is good to see rising wages, what ultimately matters for workers and families is that their paycheck can actually purchase a larger basket of goods and services.
This is why labor supply responds to changes in real wages, not nominal. Case in point is that on the eve of the pandemic, fully 75 percent of the flows into employment were individuals coming from out of the labor force, attracted by strong real wage growth across the income distribution, but particularly among production and nonsupervisory workers.
To achieve full labor market recovery, it is important that fiscal policy gets things right on both the demand and supply sides. If policymakers focus solely on massively raising aggregate demand without considering that, in the short-run at least, supply is inelastic, then even big wage gains in nominal terms are entirely eaten up by inflation. Director at Greenmantle LLC , a macroeconomic and geopolitical advisory firm.
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