Figure 10-4: How inflation affects growth in real average hourly earnings
The top panel of this chart depicts Y/Y growth in individuals’ hourly wages in current-dollar terms (black line), compared with Y/Y consumer price inflation—i.e., the PCE deflator (red line). Hourly wage growth less the effects of inflation yields Y/Y growth in individuals’ real (deflated) average hourly earnings (bottom panel, green line)—a good measure of changes in the unit purchasing power of the 90% employed—excluding the lagging effect of employment itself. This is perhaps the most powerful of all drivers of consumer spending and, therefore, the economy in general. Despite this, it is often ignored by economists in their forecasting efforts.
Current Comment: Rising inflation (red line, top panel), combined with slowing average hourly wage growth (black line), has resulted in recent months in Y/Y decline in real average hourly wages. This is a clearly negative sign development in the outlook for consumer spending and, therefore for the economy and stock market as a whole.
