Thursday, May 11, 2017

Real wage growth looks set to resume

 - by New Deal democrat

Since nominal nonsupervisory wages have been growing at a rate of between 2.2%-2.6% for the last 18 months, all of the variation in *real* wages has been because of changes in the rate of inflation.  And that, in turn, has been primarily due to changes in the price of gas: 

When gas prices plummeted beginning in late 2014, real wages started to rise. When gas prices started to rise again one year ago, real wages went flat, and even declined a little.

This lack of real wage growth is the prime culprit behind the recent downturn in spending, as measured both by real retail sales, and real personal consumption expenditures:

That looks likely to change, and for the same reason: gas prices.

In the last several months, oil prices at first flattened, and in the last several weeks have turned down significantly:

Oil prices are actually *down* now YoY.

Gas prices aren't negative YoY at this point, but have also started down (h/t GasBuddy):

As I've pointed out numerous times over the last few years, gas prices are the chief determinant in the variance in the headline inflation rate.  In the below graph, I've divided the change in gas prices by 16, and subtracted -1.8% for the typical underlying core inflation rate, for the last 20 years:

The relationship isn't perfect, but it's pretty darn good.

Note the recent deceleration in YoY gas prices, now up only about 7%.  That translates to a continued abatement in YoY inflation to just a little over 2%. And that doesn't even count the effect of the downdraft in oil prices last week.

In short, the downturn in oil prices suggests that at least mild real wage growth is about to resume.