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Wages need to rise in real terms, not just nominal terms

Last Thursday, the Department of Labor reported that prices had risen at their fastest rate since 2012 over the past year. For the 12-month period ending in June, inflation clocked in at 2.9%. This might be good news to central bankers, but to the average American it is probably less welcome.

As the Chicago Tribune reported,

The cost of food, shelter and gas have all risen significantly in the past year. Gas skyrocketed more than 24 percent, rent for a primary residence jumped 3.6 percent and meals at restaurants and cafeterias rose 2.8 percent.

Prices have risen roughly at the same rate as wages, erasing any gains workers may have hoped to realize via bigger paychecks.

One of the first things you learn in economics is the difference between nominal increases and real increases. If your wage goes up from $500 a week to $1,000 a week, you have had a nominal pay rise of 50%. But if prices also double, your new money can’t buy you any more than you could buy before. In this case, your real pay rise is 0.

As Federal Reserve Chair Jerome Powell told NPR, “we’re starting to see” some pick up in wages after lackluster growth in recent years. We have seen this here in Minnesota. But we are also starting to see prices rising at an increased rate. The latter is cancelling out the former.

There are a number of causes for the recent increase in the inflation rate, the new tariffs being one, monetary policy another. For reasons to arcane to go into here, central bankers have, in recent years, been desperate to get prices rising again.

After a prolonged period of wage stagnation, the recent rise in wages is to be welcomed. But it won’t help folks much if rising prices cancel out the benefits.

John Phelan is an economist at the Center of the American Experiment. 

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