On September 11, 2024, the Bureau of Labor Statistics (BLS) released data that includes the month of August 2024. The year-over-year CPI inflation rate came in at 2.6%, still above the Fed’s target of 2% inflation. However, the Fed’s target is in terms of the PCE price index, and a 2% inflation rate in the PCE price index would historically coincide with roughly a 2.3% inflation rate in the CPI.
In addition, the recent monthly inflation rates tell a positive story. The annualized monthly rate from July to August was 2.3%. For the last four months, the average of the annualized monthly rates is 0.9%.
While the ‘Headline’ CPI is designed to measure an average of all prices based on household spending, the ‘Core’ CPI, the CPI Less Food and Energy Prices, excludes prices that are said to be more volatile. Some claim it provides a better measure of the underlying or more persistent inflation, and that it is a better predictor of future headline inflation. The year-over-year core CPI inflation rate came in at 3.3% in August. This core inflation measure had an annualized monthly value for August of 3.4%, and the average annualized monthly rate over the last four months has been right at 2%.
These monthly indicators are good news on the inflation front and give the Fed little reason to deviate from its recent pronouncements that inflation has largely returned to its targeted path.
Figure 1 graphs these CPI inflation rates since January 2021, and the volatility of the monthly (annualized) rates is apparent. It is also clear that the year-over-year rates are above the 2% target, but the monthly rates for May through July are lower than 2%.
The BLS also released wage data earlier this month and average hourly earnings of all private sector workers increased by 0.4% from July to August, an annualized rate of 4.9%. Year-over-year, wages in August 2024 were 3.8% higher than a year ago.
It is more important to focus on real wages, i.e., wages adjusted for inflation. An increase in real wages is an increase in the purchasing power of wages. Wages in August were 3.8% higher than a year ago, and prices were 2.6% higher, so real wages rose by 1.2% over the past twelve months.
Figure 2 graphs wages, the CPI, and real wages since January 2021. This graph explains the current dissatisfaction with the state of the economy, and with the recent period of high inflation. The decline in real wages from January 2021 through June 2022 is clearly visible, as the CPI grew substantially 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 have led to a period of generally positive but small increases in the purchasing power of wages. Wages have still not completely caught up with the rise in prices. As of August 2024, the purchasing power of wages was still 1.7% lower than in January 2021.
