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While Price Inflation has Curled Upwards, Wage Growth has Continued its Descent

CAMS Weekly View from the Corner - Week ending 5/10/24


May 13, 2024


This week we begin a new round of updates on the general price inflation landscape.  The Consumer Price Index (CPI) will update Wednesday morning which will inform as to whether its growth rate will continue to curl upwards as in recent releases or simply remain in its general range of the previous year.

 

Nearly a year ago expectations reached the foregone conclusion that price inflation was done. 

 

The expectation back then was that in near-term months the data would reflect this forgone conclusion.  That was shattered as the passing months of data offered price inflation rates were remaining uncomfortably high.

 

Along the path Fed Chairman Powell often insisted the Fed’s policies were restrictive and would need time to have an impact on price inflation.  This was offered while general financial conditions trended consistently looser as economic/market participants were fully expecting coming rate cuts brought on by the Chairman and his Fed’s soft messaging.

 

Essentially he had consistently offered the Fed was restrictive in its policies (think tight monetary policies) but consistently allowed for numerous interest rate cuts to be entered into the national discussion which then became the expectation. 

 

Participants act in large part on what is coming, or what they think is coming, not on what is right in front of them.  That is participants act on a forward view and if they have reason to believe rate cuts are coming they will begin to act accordingly before they arrive. 

 

Just one of many examples is how they can bid up government debt instruments in anticipation of rate cuts.  When they do so it results in market based interest rates moving lower and through this process the “expected rate cuts” become current reality in light of the downturn in bond market interest rates. 

 

Taken a step further in this example, mortgage rates then get their cue from government bond market rates and trends.  If those markets are trending lower on an interest rate (yield) basis in light of market participants bidding up said instruments then in reality rate cuts start now, to include mortgage rates, rather than downstream when the Fed officially takes action. 

 

This is only one macro example of how financial conditions loosen brought on in large part by not only what the Fed is doing but also by what they are saying which then broadens out to a national conversation/expectation.

 

Importantly and to emphasize, this all occurs in light of collective participant’s belief that rate cuts will be coming. 

 

This is why we have gone ad nauseam on questioning Powell on his soft language over the previous many months for allowing rate cut discussions to even be allowed on the financial playing field when price inflation was certainly not over. 

 

This is analogous to popping champagne bottles in the beginning of the 4th quarter of X championship event. 

 

Upon observing this, the coach (Powell) would certainly be expected to halt that in its tracks.  Instead, the coach joins in with exuberance.  How would you expect that to work out? 

 

Thus far it hasn’t worked out for the citizenry relative to price inflation.  Allowing for loosening financial conditions (claiming victory) in the face of price inflation that is not ending is the financial system’s version of a 4th quarter champagne celebration.  It might work out but highly doubtful. 

 

Wages are dropping Again   

 

During the infamous “transitory” price inflation stage, circa 2021, price inflation was escalating rapidly while wages were not.  This left the everyday wage earner crushed between the millstone of rapidly rising price inflation and comparatively going nowhere wage growth rates. 

 

Bringing the two together is known as real wages in econ jargon.  That is, taking the actual growth rate of wages and adjusting them with the actual growth rate in prices. 

 

If wages are growing by 3% and price inflation is growing by 2% we have a positive real wage of 1%.  Conversely, if wages are growing by 3% but price inflation is growing by 4% we have a negative real wage of 1%.  Economic life for the everyday household is always about positive real wage/income growth.  Otherwise, said household is drowning in prices.

Above is a 10 year chart for some perspective of real wage growth rates.  Above we are merely adjusting the growth rate in wages by the growth rate in prices via the Consumer Price Index. 

 

Our red circle highlights the two year run where wage growth rates were solidly negative when adjusted for price inflation.  During this time the everyday household’s wages were run over by the rampant price inflation. 

 

As a side note and as covered in several editions in the previous year, we also saw a tremendous and simultaneous increase in credit card use by households.  We have offered this has been one approach toward a relief valve if you will by general households to maintain their standards of living.  This holds true to current day.  This is just one of many negatives that build when real wage growth rates go consistently negative.

 

Per our red arrow we see a downtrend has developed for real wage growth.  The beginning point of this arrow is June of 2023, shortly after general financial conditions began to loosen in late spring of 2023. 

 

As price inflation has refused to end real wage growth rates have continued to trend lower.  The two together equal our red arrow. 

 

Importantly, after the two year run of negative inflation adjusted wage growth rates the level of positive inflation adjusted wage growth levels have been undersized if viewing through a “catch up” lens. 

 

There was much damage incurred for the everyday household during that two year run.  Repairing that damage will take a notable positive inflation adjusted wage growth rate in both size and consistency.  Per our red arrow we are not seeing the much needed repair.  

 

If the above chart goes negative again we may be looking at the 2.0 version of the aforementioned transitory period which will serve another blow to general households. 

 

The impact that may have on the general economy offers concern.  There is only so much credit card debt that can be incurred by households to offset lack of inflation adjusted wage growth rates.

 

Price inflation data in near-term months will prove critical for the above measure and through this the broader socioeconomic storyline.


I wish you well…


Ken Reinhart


Director, Market Research & Portfolio Analysis

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