Misery Index: Wages Aren’t Keeping Up with Surging Inflation

(Ryan McMaken, Mises Institute) According to new data released Friday by the Bureau of Labor Statistics, price inflation in November rose to the highest level recorded in nearly 40 years. According to the consumer price index for November, year-over-year price inflation rose to 6.8 percent. It hasn’t been that high since June 1982 when the growth rate was at 7.2 percent.

November’s increase was up from October’s year-over-year increase of 6.2 percent. And it was well up from November 2020’s year-over-year increase of 1.13 percent.

This surge in price inflation comes only a week after Fed Chairman Jerome Powell backtracked on earlier comments dismissing the threat of price inflation, and suggested previous attempts to define recent inflation as “transitory” wasn’t quite accurate. Declaring last week that it was “a good time to retire the word,” Powell continued his pivot to addressing the danger of inflation “becoming entrenched.”

It’s unclear to what degree inflation might already be entrenched, but year-over-year growth in the CPI has been over five percent for the past six months—and on a clear upward trajectory.

At the same time, inflation is taking a bite out of workers’ purchasing power. November’s numbers on average hourly earnings suggest that inflation is erasing the gains made in workers’ earnings. During November 2021, average hourly earnings increased 4.8 percent, year over year. But with inflation at 6.9 percent, earnings clearly aren’t keeping up:

Source: BLS: Table B-3. Average hourly and weekly earnings of all employees on private nonfarm payrollsConsumer price index.

Looking at this gap, we find that real earnings growth has been negative for the past eight months, coming in at negative 2.1 percent year-over-year growth for November 2021. November was the eighth month in a row for negative growth in earnings.

Moreover, according to the Conference Board, US salaries are growing at a rate of approximately 3 percent this year.

Combined with November’s unemployment rate of 4.2 percent, November’s inflation growth puts the US misery index at 10.82. That’s the highest level since June of this year, and similar to the misery index levels experienced when the unemployment rate surged in the wake of the 2008 financial crisis.

In addition to CPI inflation, asset-price inflation will likely continue to be troublesome for consumers as well. For example, according to the Federal Housing and Finance Agency, home price growth has surged in recent months, with year-over-year growth now coming in at 16.4 percent.

Politically, there is now clearly pressure on the Fed to “do something” about inflation. In addition to inflation’s impacts on earnings, inflation already has the potential to impact corporate profits as well. Nonetheless, today’s inflation news did not send the Dow down, as inflation fears were probably already priced in following Powell’s comments last week on rising inflation and his statements on the potential for speeding up the Fed’s ultra-slow tapering process:

In testimony before a Senate panel on Nov. 30, Federal Reserve Chairman Jerome Powell tipped the warning that the central bank would discuss speeding the taper of its $120 billion monthly bond purchases at the December meetings. His comments followed a parade of Fed speakers, who all suggested the central bank could end the program sooner than the current timeline of June 2022.

But just how much will the Fed really scale back QE ? Yes, inflation can impact profits, but scaling back QE can also be a big problem for asset prices. The Fed has proven to be extremely cautious on this latter front. Even if the Fed speeds up this tapering process, it will still be a stretch to describe the Fed’s posture as anything approaching “hawkish.” 

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