Category Archives: Econ Data

A Short Update on the CPI

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This post is just a short update on the CPI, as a follow-up to a post last month.  The Bureau of Labor Statistics issued today its regular monthly update on the CPI, with figures through September.  As discussed in earlier posts on this blog, I find the six-month moving average for the change in the CPI (annualized) as the most interesting presentation of the data as it picks up changes in the trends well while not being subject to the volatility of changes over shorter periods.

For the six-month period ending in September, the annualized rate of change in the overall CPI is now just 1.6% – or well less than the 2% target many often refer to.  The CPI for everything-but-shelter is now growing at an essentially zero rate (0.1% to be more precise).  And the rate of change in the shelter component of the CPI continues to fall, growing at an annual rate of 4.2% over the past six months – the lowest since the six months ending in July 2021 (when the country began to emerge from the Covid crisis).  This is close to what it has been in the past decade, other than in 2020 when the price index for shelter collapsed (along with much else) due to the Covid crisis, and then the rise from 2021 to recently.  Between 2014 and 2019, the shelter component of the CPI consistently rose at a rate of between 3 and 4% (annualized).

The inflation rate has definitely come down to a level that can be considered normal.

Real Wages of Individuals Under Obama, Trump, and Biden

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There have been repeated assertions by Trump during the presidential campaign (as well as by Vance in the October 1 debate between the vice presidential candidates) that people’s wages were higher under Trump than they now are under Biden.  What has in fact happened?

The chart above shows how indices of the real wages of individuals have moved during the last two years of Obama’s presidency, the four years of Trump’s presidency, and Biden’s presidency through to August 2024 (the most recent data available as I write this).  There is much to note, but first a few words on the methodology.

The primary data comes from the “Wage Growth Tracker” website provided by staff at the Atlanta Fed.  It makes use of data generated as part of the Current Population Survey (CPS) of the Bureau of Labor Statistics.  From the way the survey is designed, they can obtain data on the wages earned by each household member at a point in time and again for that same individuals twelve months later.  From this raw data, staff at the Atlanta Fed calculate for the individuals in the matched households how much their wages changed over those twelve months.  Since the CPS also collects information on the individuals themselves, they can also then determine what the average (as well as median) changes in wages were for individuals grouped by various characteristics, such as age or gender, race, education, occupation, and more.  The chart above shows both how real wages changed for workers as a whole, as well as the changes with wage-earners grouped by quartile of wage income, from the lowest to the highest.  The figures shown here are for the medians in each category.

The Atlanta Fed wage data goes back to December 1997, is presented in terms of the 12-month percentage changes, and is in nominal terms.  I converted the data to real terms based on the change over the same 12-month periods in the overall CPI (formally the CPI-U, produced by the BLS), converted this to an index number, and then rebased this to set January 2021 equal to 100.  The result is the chart at the top of this post.

In interpreting these figures, it is critically important to recognize that they reflect what households actually experience in terms of the changes in their individual wages.  This differs from what one will normally see when reference is made to changes in mean (i.e. average) or median wages.  The figures in the chart track the experience of individuals, and individuals will normally see their wages start relatively low – when they are young and inexperienced – and then grow over time as they gain skill and experience.  That is the normal life cycle.

Statistics on wages as normally presented, in contrast, measure not what the experience is of individuals, but rather movement in the overall mean or median wages of all those in the labor force at the time.  Changes in such wages will normally be less than what one observes for individual wages, as the labor force is dynamic, with young people entering (at normally relatively low wages) while older people retire and leave the labor force (at normally relatively high wages).  This will reduce the measured growth in average wages as higher-wage workers have left while lower-wage workers have entered.  While this change in the average wage of all those employed at each point in time is a useful statistic to know, it does not reflect the lived experience of individuals, who normally see their wages grow over time (at least in nominal terms) as they gain experience and hence ability.

One sees a consequence of this in the chart above.  Those in the lowest quartile of the distribution of wage earnings have seen growth in the wages they earn as individuals that is greater than the percentage increases of those in the higher quartiles.  This is because those starting out in the labor force – and entering at relatively low wages – generally see a relatively fast rate of wage growth as they gain skills and are promoted.  This slows down over time, with older workers still receiving annual wage increases (in at least nominal terms) but not as large in percentage terms as young workers do.

Tracking the real wages of individuals is therefore of interest, but cannot then be used to track over long periods of time what has happened to average (or median) wages.  But for periods of several years, as well as for a comparison of growth in some early period to growth in a similar later period, tracking as in the chart above is of greater interest than what has happened to average or median wages of an always changing labor force with young workers entering and older workers leaving.  It is useful in comparisons of the growth in wages between presidential terms.

With this understanding, a number of points may be noted on individual wage growth in recent years:

a)  Individual wages in real terms were rising at a reasonable rate in the last few years of the Obama administration.  They then grew at a similar rate (not a faster rate) during the first three years of the Trump administration prior to the disruptions due to Covid.  In fact, the growth rate of overall individual wages (as measured at the medians) was 1.4% per annum in real terms during the final two years of the Obama administration (January 2015 to January 2017), and then the exact same 1.4% per annum in real terms during the first three years of the Trump administration (January 2017 to January 2020).

Trump has repeatedly claimed that wage growth (as well as many other things) were the highest ever during his administration, but that is not the case.  The most that Trump can rightfully claim is that he did not mess up the growth path that Obama had put the economy on following his reversal of the economic and financial collapse that began in 2008, in the last year of the Bush administration.

b)  With the onset of the Covid crisis in early 2020, individual real wages in fact rose despite the chaos of the lockdowns.  This might appear perverse, but in fact makes sense.  First of all, the rate of unemployment shot up to 14.8% – the highest it has been since the Great Depression (so Trump now owns this record).  But 85.2% remained employed, and were employed under often difficult personal circumstances given the easy spread of Covid and a lack of preparation by the Trump administration for the approaching pandemic.  (Trump instead repeatedly stated that all would be fine; that the virus would quickly disappear; and that banning flights from China had been a great success in stopping the virus.)

Those who remained in their jobs during this difficult period were often compensated well for their willingness to do so.  They received significant increases in their wages and/or bonuses.  The alternative of unemployment was also not as bad as it normally would be.  Aside from the safety aspect of protecting yourself from exposure to Covid, programs for the unemployed at the time were more generous and more easily available than they normally are, due to special legislation passed to address the exceptional circumstances of Covid.  Workers had this alternative, and firms had to respond.  Firms also received often generous support through various special programs during this period, that enabled them to pay higher wages to the employees who remained on the job.

Thus one sees in the chart above that individual real wages in fact rose in 2020, despite of (or perhaps one should say because of) the Covid disruptions.

c)  The Covid disruptions continued into 2021 and the first half of 2022, while the special support programs for firms and the unemployed were scaled back to normal.  But supply chains had been radically disrupted globally due to the crisis, did not start to recover until vaccines became widely available, and then required time to catch up and normalize.  And while supply was constrained, demand rose more quickly starting in 2021 as shoppers returned.  This demand was especially high both because of pent-up needs or desires for items not purchased in 2020 due to the lockdowns as well as caution due to the easy spread of the disease, while personal savings were exceptionally high and could now be spent.  Savings (and bank accounts) were high due both to the lack of spending in 2020 and to the extremely generous financial support packages passed under both Trump and Biden.

Global supply chains then worked themselves out by mid-2022.  The rate of inflation had been relatively high before then due to the high demand confronting limited supply, but inflation as measured by the CPI index for all items other than shelter then fell dramatically from July 2022 once supply was no longer constraining.

This inflation was then reflected in the decline in real wages from early 2021 to the trough in June 2022, as seen in the chart above.  From January 2021 to June 2022 the overall individual real wage fell at a rate of 3.5% per annum.  But probably a more appropriate measure would be for the period from January 2020 (immediately before the Covid crisis) to June 2022.  Over this period, the overall individual real wage fell at a rate of 1.2% per annum.

d)  Once Covid and its related impacts were largely over in mid-2022, real wages immediately began to grow again.  And indeed, they have grown since then (through at least to August 2024 – the most recent data available as I write this) at a rate of 2.5% per annum.  This is substantially faster than the pace they had grown under Trump (as well as under Obama before him), although this can be attributed in part to a recovery from the decline in the period ending in June 2022.

With this recovery, the overall individual real wage is now back on average to where it was in January 2021.  And the real wages of those in the lowest quartile and in the second quartile of the wage income distribution are now significantly higher than they have ever been.  But the levels as of August 2024 should not be seen as especially significant in themselves.  August is simply the most recent data available.  Rather, what is significant is the strong growth seen in real wages since June 2022, with no sign yet that that strong growth is abating.  Eventually that growth will likely return to the longer-term growth seen under Obama and then in the first three years of Trump, but it is not there yet.

e)  One should also note that all these figures are for the medians over a diverse population.  While the overall figures (whether measured at the means or the medians) have gone up and down, the actual real wages of any given individual can be quite different.  While the median individual real wage is now back to where it was in January 2021, this will not be true for everyone.  That diversity in experience needs to be recognized and acknowledged.

 

Biden inherited an economy that had suffered the sharpest downturn and highest unemployment since the Great Depression.  Managing the onset of the Covid pandemic in 2020 would have been difficult for even the most competent of administrations, but the Trump administration was far from the most competent.  The impacts of that crisis – on supply chains among other effects – continued into 2021 and the first half of 2022, and they led to falling real wages over this period.  But as supply chains normalized, real wages began to recover.  As of August 2024, overall individual real wages are back to where they were in January 2021.  But more importantly, those real wages have been growing at a rapid pace since mid-2022 and as yet show no sign of slowing down.

An Update on the CPI

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On September 11, the Bureau of Labor Statistics (BLS) released its new monthly report on the CPI, with data through August.  A number of recent posts on this blog have discussed the CPI figures, how the CPI is calculated, and the important role in the last few years of the price of the shelter component of the CPI (housing, basically).  This short post will provide an update with the more recent figures.

Inflation has dropped sharply this year.  In terms of the most recent 6-month period (i.e. February to August), the overall CPI has grown at an annualized rate of only 2.0% (or 1.98% to be more precise).  A 2% rate is generally seen as an appropriate target – as lower inflation than this can complicate macro management – so this is significant.  While the Fed focuses its attention on a different index of inflation (the deflator for Personal Consumption Expenditures in the GDP accounts, and on the core index that excludes food and energy prices), the Fed of course looks at a wide range of indicators, and not just of inflation, as it makes its decisions on monetary policy.  The 2.0% rate for the overall CPI matters.

As has been the case since mid-2022, increases in the cost of shelter as estimated by the BLS have kept the CPI higher than it otherwise would be.  But inflation in the cost of shelter has trended downward this year, from a 6-month rate ending in January of 5.6% (annualized) to a pace of 4.6% in the most recent 6-month period ending in August.  And inflation in the everything-but-shelter component of the CPI is now only 0.5%.

As was discussed in my earlier post on methodology, the cost of shelter component of the CPI is based on data gathered on what actual rental payments are for housing, and then applying these (after adjusting for quality, location, and other differences) to impute what rental “payments” would be for owner-occupied homes.  Those imputed “payments” are then counted as part of household incomes in the GDP accounts, as if they were a payment from the homeowner to themselves for the right to live in their homes.  This is not unreasonable, as homes do provide an important service, where the stock of owner-occupied homes contributes to the living standards in the country and hence to GDP.  The approach taken provides an estimate of the value of those services, which is reasonable.  (Note that the Bureau of Economic Analysis (BEA) of the Department of Commerce, not the BLS, is responsible for the GDP account estimates.  The BEA follows a similar approach, however.  See my earlier post on methodology.)

But one should also recognize implications that are often ignored.  First, while inflation in the cost of shelter might be “high”, that inflation is a wash to homeowners as they receive in “income” the same that is being “paid” in rent.  Of course, in reality such rents-to-yourselves are neither being paid nor received.  Rather, the point is that homeowners are paying no more for their shelter no matter what inflation rate is recorded in the shelter component of the CPI.  And the shelter component accounts for a very high share – 36% – of the overall CPI.

Second, from a longer-term perspective, homeowners will gain as prices in this shelter component of the CPI rise.  Rental rates are increasing and hence their homes are becoming more valuable.  Home prices will appreciate, and homeowners will be able to sell their homes for a price that is higher than what they paid.

[Side Note:  Some might mistakenly jump to the conclusion that if the homeowner will be buying a new home when they sell their old one, they will lose due to the now higher prices.  That is mistaken.  To the extent the new home is similar in size and quality to their old one, then the transaction would be a wash, as what they would receive on their old one would be similar to what they would need to pay for their new one.  It would be only in cases where they would want to move to a larger or fancier home that they would then pay more for the increment in “housing” that surpassed in the new home what made up their former home.]

That is, homeowners gain to the extent that home rental rates – and hence the shelter component of the CPI – go up.  Their homes have become more valuable.  Higher rental rates, and hence increases in the shelter component of the CPI, are certainly a cost to those who rent.  But those who own their home, and see the value of their home appreciate with the increases in the rental rates, will gain.  One is the mirror image of the other.  And with homeowners making up 66% of households in the US (according to US Census Bureau figures), the homeowner side of the issue should not be ignored.

There are certainly distributional issues here to be noted.  Homeowners and renters sit on opposite sides of what they should want to see in home prices.  Homeowners would like those prices to rise, while renters would rather that those prices (and hence the rents they have to pay) fall.  Socially, one should also recognize that homeowners in general enjoy higher incomes than renters.  Thus higher home prices will benefit those with on average higher incomes than the incomes of those who rent.  But the key point to recognize is that there is such a disparity of interests.  There are those who gain, as well as those who lose, by a more rapidly growing cost of shelter in the CPI.

Housing is important, and constitutes a high share of the overall CPI.  Because increases in rental rates are still, as measured, growing at a 4.6% annual rate over the past half-year, the overall CPI rose at an annual rate of 2.0%.  But for homeowners – who are not actually paying more for their shelter as the imputed rental rates rise – the relevant measure for their cost of living is the CPI for everything but shelter.  And the everything-but-shelter portion of the CPI has increased at an annual rate of just 0.5% over the past six months.  That is well below any 2% inflation target, and indeed, is getting pretty close to zero.