Prices are Rising at Historic Rates, and Rising Much Faster than Wages

The Bureau of Labor Statistics (BLS) just released the Consumer Price Index for March 2022 and the price level has now increased 9.7% from January 2021 to March 2022 and 8.5% from March of last year.  Moreover, the increase in prices has been accelerating.  From the first three months of 2022, prices have risen at an annualized rate of 11.3%, and for the month of March prices rose at an annualized rate of 16%!  The White House said it expected the March inflation rates to be ‘extraordinarily elevated.’  Well, they were right.  We haven’t seen such inflation rates since the early 1980s.

And what about wages?  The BLS also reported last week on average hourly earnings of all employees in the private sector.  Wages have increased by 6.0% from January 2021 to March 2022.  This would seem to be a healthy increase in wages, except that prices are rising considerably faster.  So, in terms of purchasing power, wages are considerably lower than they were in January 2021.  Moreover, wage growth has been slowing during 2022 while prices have been rising.  Wages have risen at an annualized rate of 4.5% for the first three months of 2022 compared to prices rising at an annualized rate of 11.3%.

Inflation-adjusted or ‘real’ wages are falling, rather continuously, over this period and the decline has accelerated in recent months.

It bears emphasis that all of this is occurring in a tight labor market.  The BLS also reported an unemployment rate for March of 3.6% - an extraordinarily low unemployment rate.  Other than in January and February 2020, immediately prior to the pandemic shutdowns, the last time the U.S. experienced such a low unemployment rate was in December 1969. 

So, we have a tight labor market and a falling real wage.  This should not continue, and eventually wages will have to rise faster than prices to restore the purchasing power of wages.  Firms will complain, but they want to hire and so they will provide higher wages -- while raising prices to cover the cost.  This is the wage-price spiral.

Our elected officials and policymakers at the Federal Reserve System and at the U.S. Treasury are responsible for this mess. Congress and the Administration spent huge amounts on a mostly-unnecessary ‘stimulus’ bill in the spring of 2021, and the Federal Reserve System has dragged its heels in responding to rather clear signs of rising inflation throughout 2021.  The Fed has a target for 2% inflation, and it has rather obviously failed, in an extraordinary fashion, to meet its target and to meets its obligation of providing price stability.    

The Fed responded very quickly, within a month, to the emergency that was the pandemic and the pandemic-related shutdowns, with an almost-immediate drop in the interest rate on reserves and initiation of a huge asset-purchase program.  Why has the Fed responded so slowly to an inflation emergency?  The Chairman and other spokespersons continue to reassure the public, but talk is cheap, as the saying goes, and actions do speak louder than words.

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Posted: April 12, 2022 by Dennis W. Jansen