Even as Inflation Cools, Inflation Adjusted Wages Are Still Down From A Year Ago

The easing of inflation in July meant that American workers actually saw average hourly wages rise when adjusted for inflation.

The Consumer Price Index was flat with June while the average hourly and weekly wages climbed 0.5 percent. As a result, real or inflation-adjusted wages rose significantly for the first time this year.

That’s a big improvement over May, when real hourly and weekly wages fell 0.6 percent, and June, when hourly wages fell 0.8 percent and weekly wages fell 0.9 percent.

Compared with a year ago, however, inflation-adjusted wages are still down.  The real average hourly wage is down three percent compared with a year ago. The real weekly wage is down 3.6 percent.

The July monthly figure is good news for workers but it may worry Federal Reserve officials. Just as the July jobs figures indicated, the rise in real wages shows demand for labor is red hot. Businesses are likely to try to pass on higher labor costs to prices and increased real wages may translate into increased real demand for goods and services, supporting inflation at a higher level than the Fed would like.

What’s more, the rise in real wages and the economy adding 528,000 workers to payrolls in July was accompanied by a slight decline in the labor force participation rate. This indicates that even plentiful jobs and rising pay are not drawing Americans into the labor force. That could hold back the economy’s ability to grow output, which would add inflationary pressure.

Many economists had been sanguine about a wage-price spiral precisely because wages had not kept up with prices. A lasting decline in real wages creates a downward pressure on inflation, as consumers cut back on spending or trade down to cheaper items. Now the reverse may be getting underway.