We learned this morning the CPI price index was flat last month, and was up 3.3% over the past year; both measures came in below expectations. Core CPI inflation, which leaves out gas and food prices, was up 0.2% and 3.4%, on a monthly and yearly basis, respectively, also below expectations (3.4% is the lowest core CPI inflation rate in over 3 years). See CEA X thread for many more details from this morning’s report.

In this post, we stress the following point: you cannot understand the impact of inflation on working families by looking solely at inflation. You also have to look at the growth in hourly earnings and other income measures, as they tell us how families’ buying power is evolving over time. After all, every price in the economy goes up over time (at varying rates, of course) so if we look solely at prices and ignore the extent to which wages or incomes were keeping up, we’d get a very skewed notion of how families are doing.

Before we get into the details, however, we echo President Biden on the point that, even when the growth of their incomes is outpacing that of most prices, households are still struggling with price levels that are too high. Both of these things can be, and are, true: real, inflation-adjusted wages are reliably rising, and high prices remain a serious concern for American households.

We begin by plotting yearly nominal wage growth for middle- and low-wage workers[1] against yearly CPI growth. The gap between the two shows that yearly wage growth has exceeded price growth for 15 months in a row. Over the past year, nominal wages rose 4.2% for these mid-level workers while inflation was up 3.3%, leading to real wage gains of 0.9% over this most recent period.

To make this relationship between wages and prices more concrete, consider the price of gas. Using AAA data on the retail gas price (see table below), the cost of a gallon of gas averaged over the month of May 2024 was $3.61; in May of 2023, the comparable gas price was $3.55 (AAA gas prices are not seasonally adjusted), up a few cents from last year (note that AAA June gas prices so far have been below last June’s prices). But because wage growth grew more over the year more than the gas price (up $1.20 for the hourly wage vs. $0.06 for the gallon of gas), for an hour of work, the average middle-wage worker could buy more, not less, gas this year compared with last.

Wages are beating prices in many other important categories. Grocery prices, while still too high, have edged down (0.2%) during the past four months, and they’re up 1% over past year, well behind wage growth, which again, was up 4.2% over the past year. Motor vehicle prices have also been coming down, falling 0.8% for new motor vehicles and a whopping 9.3% for used vehicles. Housing costs, on the other hand, were up 5.4% over the past year, ahead of wage growth. Restaurant inflation, which has come down a lot less than grocery inflation, rose at about the pace of wage growth over the past year (4%).

There are, of course, many more ways to cut into this question of the relative growth rates of wages and prices, looking over different time periods and using different income measures. For example, using quite different data for both incomes and prices, real after-tax income per person is up 0.5% or about $300 over the past year, and up 6%, about $3,700 relative to its pre-pandemic level in December 2019.[2]

We conclude with three broad points. First, if we are trying to understand how families buying power is faring, to simply cite higher inflation without considering the wage or income side of the ledger is misleading and incomplete analysis. Second, wage and income growth have been consistently beating inflation for some time now. Third, none of this good news contradicts the fact that prices are still too high, and that we must therefore build on the progress documented herein. That means maintaining the strong job market as it is demonstrably delivering real wage gains, while doing everything we can to help families still struggling with high costs.

Our administration will continue to pursue that critically important agenda and CEA will continue to report on our progress.

[1] This post focuses on the production, non-supervisory wage, covering 80% of the workforce blue-collar manufacturing jobs and non-managerial service jobs.

[2] These data cite real disposable income per-capita, through April, deflated by the PCE price index to April 2024 dollars.

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