Wage Gains Beat Inflation For Six Months Straight. Is That Good News For John McCain?

If wages beat inflation, is that inflationary too?

Politico reports what should be good news for Joe Biden:  For the past six months, Americans' wage gains have outpaced inflation, especially as reflected in significantly lower prices for gasoline, cars, furniture, and other stuff, but not houses or eggs yet, which has led to at least one ill-advised attempt to make a Western omelet out of a split-level ranch.

So with the 2024 presidential election apparently coming up next month, Politico says, this could very well "[undercut] one of the main Republican arguments against [Biden's] handling of the economy."

“People really know how far their paycheck goes,” Jared Bernstein, a member of Biden’s Council of Economic Advisers, said in an interview. “When gas prices are down $1.70 relative to where they were last summer, that’s the kind of breathing room that people recognize.”

Well gosh that's pretty terrific news for Joe Biden, at least until the next paragraph, where Politico warns it could all go sideways because any good economics story is required to be an endless series of perils and cliffhangers, kind of like the old movie serials that so inspired both George Lucas and Steven Spielberg.

Yet that progress could be in jeopardy: As Federal Reserve officials prepare to meet next week to raise interest rates again, their inflation-fighting crusade — which Fed Chair Jerome Powell has vowed to continue — has sparked fears of a recession, meaning that workers could be forced to give up those hard-fought gains.

The economy added 4.5 million jobs in 2022, and data to be released on Thursday is expected to show that GDP increased by an annualized 2.8 percent in the last three months of the year, defying downturn worries for the time being. But that may change since the impact of the Fed’s aggressive rate hikes has not yet been fully felt in the economy.

Well that was an expected plot twist! Don't miss next week's exciting matinee to see if Joe Biden can get out of this latest fix! Will Kevin McCarthy use the GOP Debt Ceiling Ray to foil our hero's brave battle for the nation's economic health? Can the Fed's less hawkish members persuade Powell to bring the economy in for a soft landing? And what about Naomi? 

The betting on Wall Street, Politico says, is that the Fed will raise interest rates only an eensy bit at its meeting next week, easing off on the sharper increases we've seen for several months. That's because price inflation is finally slowing down:

The consumer price index rose 6.5 percent across all of last year, down from 9.1 percent for the 12 months ending in June. Average hourly earnings grew more slowly — 4.6 percent — over that time period. But a steady drop in inflation in the second half of the year helped income surpass price increases, bringing real worker pay roughly to the same level it was prior to the pandemic.

Cool beans! Let's try not to have a recession, then. I think that would be bad.

Give us more reassurance, then, Politico, before the next paragraph o' doom:

In a draft paper , economists Guido Lorenzoni and Iván Werning found that, in the wake of an economic shock, inflation-adjusted wages might drop at first but then begin to rise as part of a normal recovery. That is, there’s room for workers to increase their take-home pay without it being worrisome to the Fed.

“You get a shock that makes the price of, say, energy inputs or microchips or lumber more expensive,” said Lorenzoni, a professor at the University of Chicago Booth School of Business. “Firms are faster to move, so they start raising prices. Workers catch up a little slower, so at the beginning, the [inflation-adjusted] wage goes down. But then workers keep catching up. At some point, firms are happy because the shock goes away. Then workers catch up.”

“If that’s the story, it kind of fits the data because it looks like real wages originally fell, now they’re recovering,” he said. “The important thing is, that is not a signal that things are completely out of whack."

Ok, well that sounds positive, so we're going to stop right here before anything bad happens to Old Yeller, the end.

[ Politico ]

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