The latest data from the Bureau of Labor Statistics shows that the average hourly earnings of all employees in the US increased by 4.1% in the year ending in November 2023. This is a slower rate of growth than the previous year, when wages rose by 4.7%. However, this does not mean that workers are worse off. In fact, the opposite is true.
The reason is that inflation, which measures the change in the prices of goods and services, has also slowed down. The Consumer Price Index (CPI), the most widely used measure of inflation, increased by 5.8% in the year ending in November 2023, compared to 6.8% in the previous year. This means that the purchasing power of workers’ wages has actually increased in real terms.
To see this more clearly, we can calculate the real wage growth by adjusting the nominal wage growth for inflation. The formula is: Real wage growth = Nominal wage growth – Inflation.
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Using this formula, we can see that the real wage growth in the year ending in November 2023 was: Real wage growth = 4.1% – 5.8% = -1.7%. This means that workers’ wages decreased by 1.7% in real terms. However, this is still better than the previous year, when the real wage growth was: Real wage growth = 4.7% – 6.8% = -2.1%. This means that workers’ wages decreased by 2.1% in real terms.
Therefore, we can conclude that even though nominal wage growth has decelerated, real wage growth has actually improved. This is good news for workers and the economy, as it means that people have more money to spend and save, which can boost consumption and investment.
The lower inflation rate may also ease some of the pressure on consumers, who have been facing higher costs for many goods and services. However, some analysts warn that inflation may not be over yet, as there are still some factors that could push prices higher in the coming months.
The Federal Reserve, which is the central bank of the US, has the dual mandate of maintaining price stability and maximum employment. To achieve these goals, it uses various tools, such as setting the federal funds rate, which is the interest rate that banks charge each other for overnight loans. The federal funds rate affects other interest rates in the economy, such as mortgages, credit cards, and loans, as well as the money supply and inflation expectations.
In response to the rising inflation and strong economic recovery from the pandemic-induced recession, the Federal Reserve started to tighten its monetary policy in late 2022. It announced four interest rate hikes in 2022, raising the federal funds rate from 0.25% to 1.25%. It also signaled that it would continue to raise rates in 2023, with three more hikes expected by June. The Federal Reserve’s actions have had the desired effect of cooling down the inflationary pressures and reducing the demand for goods and services.
Another major factor that contributed to the lower inflation in December was the decline in energy prices. Energy is one of the main components of the CPI basket, accounting for about 7% of its weight. Energy prices are volatile and depend on various factors, such as supply and demand, geopolitics, weather, and technology.
The lower energy prices also had a spillover effect on other categories of the CPI basket, such as transportation and food. Transportation costs fell by 1.9% in December, mainly due to lower airfares and car rental fees. Food costs rose by only 0.2%, compared to 0.9% in November, as lower energy costs reduced the costs of production and transportation of food items.
The fall in inflation in December was welcome news for consumers and businesses, who have been struggling with higher costs and lower incomes for months. However, it is too early to celebrate or relax. Inflation is still above the Federal Reserve’s target of 2%, and there are still many uncertainties and risks that could push it higher again. For example, the new Omicron variant of Covid-19 could disrupt global supply chains and demand patterns; labor shortages and wage pressures could increase production costs; geopolitical tensions could affect oil markets; and inflation expectations could become unanchored.