We have been detailing the current administration’s record in terms of inflation and real wage growth starting in January 2021. Today, January 15, 2025, the Bureau of Labor Statistics (BLS) released data on the CPI through the month of December 2024, representing the next-to-last month of data for the current administration. The year-over-year CPI inflation rate came in at 2.9%, still well above the Fed’s target of 2% inflation measured on a year-over-year basis. It is true that the Fed’s target rate is in terms of the inflation rate measured using 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, so that Fed is ‘only’ about 0.6% over its target. This is of course a huge improvement over the inflation rates in the summer of 2022, but it is still thirty percent above target after two and a half years.
Back in January 2021, and in February 2021, the year-over-year inflation rate was below the Fed’s target rate of 2%. Starting in March 2021 and continuing every month up to and including this latest read in December, the CPI inflation rate has been above 2%, and indeed, above 2.3%. If anything, the current reading of 2.9% year-over-year is higher than the November reading of 2.7%, the October reading of 2.6%, and the September reading of 2.4%. Which is to say, the inflation rate is indeed much reduced, but it remains stubbornly above the Fed’s target.
One can also look at monthly inflation rates. These are much more volatile, which is part of the reason that the Fed’s target is stated as a year-over-year rate. Still, these monthly readings can be looked at, carefully, for hints of future movements in the year-over-year measure. The monthly price increase in December was 0.4%, implying an annualized inflation rate of 4.8%. This follows a November monthly rate, annualized, of 3.8%, and a October monthly rate, annualized, of 3.0%. These are only three months, but they are all well above 2%, and the (very short) trend is not encouraging.
The BLS also released data on other CPI measures, and one that also gets attention is so-called Core CPI. Inflation measured from the CPI is often called ‘Headline Inflation,’ to distinguish it from a second measure based on the CPI Less Food and Energy. This second measure is often called Core CPI, and inflation measured using Core CPI is often called ‘Core Inflation.’ While the CPI measures the cost to a household of purchasing consumer products including food and energy, the core measure excludes food and energy spending on the grounds that prices for these goods are volatile and often revert to a long run level. While controversial, there is a frequent claim that core inflation is a better predictor of future inflation than is headline inflation. Consumers obviously feel the sting of headline inflation, but policymakers may want to look at core inflation to provide a better idea of how future inflation rates will unfurl. The Federal Reserve, for instance, makes projections of both PCE inflation and a core-PCE inflation rate.
The year-over-year core CPI inflation rate came in at 3.2% in December, higher than the headline inflation rate. The one-month change in the core CPI from November to December implies an annualized monthly inflation rate of 2.7%.
It does appear that these inflation readings have influenced the Fed, which seems to have largely modified its stated prior expectations of near-term policy rate cuts.
Figure 1 graphs the 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 remain above the 2% target.
The BLS also released December wage data earlier this month, and average hourly earnings of all private sector workers increased by 0.3% from November to December, an annualized rate of 3.4%. Year-over-year, wages in December 2024 were 3.9% higher than a year ago.
It is more important to focus on the purchasing power of wages, what economist call real wages or wages adjusted for inflation. An increase in real wages is an increase in the purchasing power of wages. Wages in December were 3.9% higher than last year, and prices were 2.9% higher, so real wages rose by 1.0% over the past twelve months.
This is a welcome occurrence for workers. However, looking at the historical record since January 2021, we see a large decline in real wages as inflation soared. Wages were rising, but prices rose much faster. Real wages declined from January 2021 through June 2022, and by June 2022 real wages were 4.2% lower than they were in January 2021. Since June 2022, real wages have risen, slowly, but in December 2024 the purchasing power of wages are still 1.5% lower than in January 2021.
Figure 2 graphs wages, the CPI, and real wages since January 2021. The data on all three variables is normalized to be 100 in January 2021. The large growth in prices over the first period, followed by continual but slower growth, is apparent. So is the continual increase in wages. Most importantly, the level of real wages, the purchasing power of wages, decreased markedly during the high inflation period and has been recovering more gradually ever since. However, despite the gradual increases over the past two years, the purchasing power of wages remains lower than in January 2021. Unless there is some large movement in the next month, it seems that this administration will go down in history as presiding over a decline in real wages.
