Inflation and Real Wages: What Consumers See vs. What Wall Street Sees

Thursday, June 21, 2007 at 10:56 AM

The Bureau of Labor Statistics recently released their reports on inflation and real wages for May, along with the usual recap of recent trends for those figures.

Real earnings dropped again for May:
Real average weekly earnings fell by 0.2 percent from April to May after seasonal adjustment, according to preliminary data released today by the Bureau of Labor Statistics of the U.S. Department of Labor. A 0.3 percent increase in both average weekly hours and average hourly earnings was more than offset by a 0.8 percent increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

... Average weekly earnings rose by 4.1 percent, seasonally adjusted, from May 2006 to May 2007. After deflation by the CPI-W, average weekly earnings increased by 1.4 percent.

So why did real wages go down? Because the cost of energy, especially gasoline, and the cost of food, were up significantly according to the Consumer Price Index release:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in May, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The May level of 207.949 (1982-84=100) was 2.7 percent higher than in May 2006.


During the first five months of 2007, the CPI-U rose at a 5.5 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 2.5 percent for all of 2006. The acceleration thus far this year was due to larger increases in the energy and food components. The index for energy advanced at a 36.0 percent SAAR in the first five months of 2007 compared with 2.9 percent in 2006. Petroleum-based energy costs increased at a 63.9 percent annual rate and charges for energy services rose at a 6.8 percent annual rate. The food index has increased at a 6.2 percent SAAR thus far this year, following a 2.1 percent rise for all of 2006. Excluding food and energy, the CPI-U advanced at a 2.1 percent SAAR in the first five months, following a 2.6 percent rise for all of 2006.

A more specific breakdown of inflation over the past three months can help pinpoint the areas really seeing high inflation:

Compound annual 3-month rate of change, ending May:

Energy -70.0

Food and beverages 4.2

Housing 2.5

Apparel (-)6.6

Transportation 30.6

Medical care 3.3

Recreation .9

Education and

communication -5.3

Other goods and

services 3.0

Special Indexes

Energy -71.0

Food -4.2

All Items less

food and energy 1.6

So the highest rate of cost increase is in energy, followed by education/communication, food, and medical care. Try avoiding those goods and services. In contrast, apparel (a relatively avoidable cost if you're really strapped for cash) is down 6.6%. Does that make you feel good?

Probably not, and for much the same reason that the NY Times reported on Saturday that:

A closely watched survey by the University of Michigan released yesterday found that consumer confidence this month dropped to the lowest level in 10 months. Americans also now expect significantly higher inflation than they expected a few months ago, the survey said.
Wall Street had a very different reaction, according to the NY Times:
Wall Street barreled higher again yesterday after the week’s most anticipated economic reading indicated that inflation excluding the price of gasoline remained tepid last month, easing some concerns that have jolted stock and bond markets in recent sessions.


The three major stock indexes finished the week higher, even as yesterday’s Consumer Price Index showed prices rose at the fastest pace in 20 months in May as the cost of gas jumped. Investors were enthusiastic that the core index, which excludes food and energy prices, rose 0.1 percent. The figure, which the inflation-wary Federal Reserve watches closely, was below the 0.2 percent increase Wall Street expected.

I don't know if the difference between the consumer response and the investor response represents a true disconnect or just a disagreement over the likely future rate of inflation. But as I've said in another post, the rising cost of food which seems much steeper to me than the official figure from the BLS is actually changing grocery shopping habits in the area where I live, to the benefit of Aldi's, a discount, bring-your-own-bags German grocery.

I don't think inflation of the essentials of food, medical care, and education will be moderating any time soon. I have real doubts that gas prices will moderate in the long term, and I don't think most Americans have any real alternatives to buying gas, given that most public transportation has been dismantled, and almost all retail shopping of any significance is now unreachable on foot.