First the good news: wages are rising; now the bad news: prices are rising much faster than wages.
The October CPI report revealed that total CPI was up an insane 6.2% yoy - the highest print since Volcker's fight with hyperinflation - with core CPI up 4.6% yoy. At the same time, the gain in wages has also been impressive with average hourly earnings running at 4.9% yoy and the broader measure the employment cost index running at 3.7% percent year-over-year, these numbers are well lower. The Atlanta Fed finds that wages for job switches are up 5.4%, the highest since January 2002, and it is starting to bleed into jobs stayers where wages are now edging higher.
So the question, as BofA notes, is which is more powerful: earning more or paying more? Not surprisingly - and in the latest humiliation for the Biden administration - the gain in prices seems to be winning.
First, a look at the scorching increase in prices: In the last few months there has been a broadening of price pressure in the economy. It is no longer the case that the gain in inflation is simply in a handful of categories related to the goods side of the economy. Yes, used car prices are up an extraordinary 29.4% year-to-date, but inflation has also skyrocketed for other goods and services (Exhibit 7)
Coming at precisely zero surprise to this website (coming months after we wrote "What Rental Hyperinflation Looks Like: "Soaring Prices. Competition. Desperation"), BofA admits that "the most concerning has been the increase in rent with owners equivalent rents up 0.43% mom SA in October marking the second month in a row of strong gains."
Sure enough, the consumer is paying close attention: today's data from the University of Michigan Survey reveals 1-year ahead inflation expectations of 4.9%...
... and the New York Fed shows 3-year ahead inflation expectations of a record 4.2% percent, though the series only dates back to June 2013. The good news for now is that long-run inflation expectations have remained better anchored. However consumers are thinking about inflation relative to their wages: the same survey finds that consumers are increasingly doubtful that wage growth will be able to exceed the price of goods and services with 43% of households reporting that prices are expected to be up more than income in the year ahead, at the highs since the 2015-16 period when nominal wage growth was stagnant and consumer spending was sluggish.
While the Biden administration is eager to discuss nominal wage growth, it has been mute when it comes to real, inflation adjusted worker income. There is a reason for that. when adjusting for inflation, real average hourly earnings were down 1.2% yoy in October and have been negative for seven consecutive months. This, and one doesn't have to be a career economist to get this, shows that wage growth so far has been offset by inflation in aggregate.
Looking at the data by industry, it tells a similar depressing story.
As the following chart from BofA shows, annual growth in average real wages for all workers are down or flat in all industries except the lowest paying leisure and hospitality sectors, i.e., waiters and bartenders
This compares to much more broad-based growth in real wages prior to the pandemic. The data is a little better for production and non-supervisory workers, and in particular for low wage industries, but there too average wages are not keeping up with inflation. Though much of the strength in low-wage industries is due to the outsized increase in leisure and hospitality wages.
While democrats are allegedly meant to focus on helping lower income social groups, the irony is that despite stronger nominal wage growth, it is the lower income consumers that will be most vulnerable to increases in inflation (and thus collapsing real wages). This is because they have a more constrained budget with typically less savings than the higher income consumer. Therefore BofA looks at the basket of spend of the lower income vs. the higher income consumer to get a sense of how inflation by category is impacting the different cohorts. Using data from the consumer expenditure survey (CE), BofA shows the composition of spend for the lowest tier versus the highest. Spending on gasoline and food makes up ~28% of consumer expenditures for the lowest income versus ~19% for the highest income.
Which brings us to the worst news for the Democrats: the combined 9.7% year-to date gain in inflation in food and energy (non-core) has a bigger hit on the lower income consumer and their ability to substitute away is limited given that these are necessary items. And while these lowest income households have no recourse to change the catastrophic policies of the Biden admin, they can vote and next November, they will.
But before that, what the Fed does will matter. As BofA notes, the Federal Reserve is paying close attention to these dynamics. They care about inflation for a variety of reasons, and this is one of them.
To the extent that inflation expectations march higher over the longer run and consumers continue to react negatively to higher prices on the view that they will prove persistent, the more likely the Fed will be to damper the inflationary pressure with tighter monetary policy.
Which is why, as BofA concludes, "the risks of an earlier end to taper and start to the hiking cycle are rising. Rate hikes in 1H of 2022 are now a possibility"