On January 11 2024, the Bureau of Labor Statistics (BLS) released the December 2023 Consumer Price Index (CPI). The year-over-year CPI inflation rate came in at 3.3% for 2023, still well above the Fed’s 2% target but significantly below the highs experienced in the first half of 2022. The monthly rate from November to December, annualized, came in at 3.7%, an increase over the reading in October and November. There news was somewhat worse in CPI core inflation rates, the inflation rate calculated after excluding the more volatile food and energy components. The year-over-year core CPI inflation rate came in at 3.9%, and the monthly increase in this measure, annualized, came in at 3.8%.
Figure 1 graphs these inflation rates since January 2021, which also shows the volatility of the monthly (annualized) rates. Moreover, while the annualized monthly rates have sometimes dropped below 2% for the CPI index, the average of these monthly rates even over the last four months is 2.6%, and for core CPI, that average is 3.5%. Clearly, the inflation rate has moderated from the historic levels seen in 2021 and 2022, but just as clearly the inflation rate has not yet returned to the Fed’s target level.
The BLS also released wage data earlier this month, and average hourly earnings of all private sector workers increased by 0.4% from November to December at an annualized rate of 5.4%. Year-over-year, wages in December 2023 were 4.1% higher than in December 2022.
Economists focus on real wages, or wages adjusted for inflation. An increase in real wages is an increase in the purchasing power of wages. Wages in December increased 0.4% over November, while prices increased 0.3%, so real wages increased by 0.1%, or at an annualized pace of 1.7%. Year-over-year, wages increased 4.1% while prices increased 3.3%, so real wages increased by 0.8%.
Figure 2 graphs wages, the CPI, and real wages since January 2021. The decline in real wages from January 2021 through June 2022 is apparent in the data, as the CPI grew faster than wages. In June 2022, real wages were 4.2% lower than in January 2021. Since then, the moderation of CPI inflation and the continued growth in wages led to a period of generally positive but small increases in purchasing power. As of December 2023, the purchasing power of wages remains 2.6% lower than in January 2021.
