The good news is your wages are up. The bad news is they’ll buy less
Last month, CNBC sent out this tweet:
It isn’t often that I’m stunned into silence, but this did it.
One of the basic confusions that people can fall into when encountering economics for the first time is to confuse ‘nominal’ with ‘real.’ Roughly put, ‘nominal’ refers to numbers in some currency, things like the dollar amount of your salary or the federal debt. ‘Real’ refers to actual magnitudes, things like how much food or fuel can your nominal salary will actually get you. If your salary doubles in nominal terms, but only allows you to buy as much stuff as you could before, you are no better off in real terms. In the majority of cases, in economics it is the real that matters.
Even so, people often confuse the two and mistake nominal increases for real increases. The CNBC article, widely pilloried and since renamed ‘It’s not certain rising wages will be enough to outpace inflation,’ demonstrated this confusion.
In its original version, it read:
As the economy picks up in the wake of the Covid pandemic, concerns about inflation are also gaining steam.
Already, prices on some goods, like cars, are noticeably higher, stoking fears that a sudden uptick in inflation will decrease purchasing power over time.
Although consumers may pay more for everyday items, it’s not all bad news as far as household income and spending goes. Companies facing a labor shortage are also paying more to get workers to walk in the door. [Emphasis added]
(The bit in bold has since been removed)
Not all of this is wrong. It is true that inflation is a concern. It is true that prices generally and especially for certain things are rising relatively rapidly (July’s lower numbers for core and headline inflation offer some hope there). And it is true that if the nominal prices of the goods and services we buy increase at a rate greater than our nominal income, then the purchasing power of that income — what it can buy, its real value — will fall. We may be better off in nominal terms, but worse off in real terms and, remember, it is real terms that matter.
That is why these rising prices are absolutely “bad news as far as household income and spending goes”: They reduce both your household income and your ability to spend.
So, on Sunday the Washington Post reported that ‘For first time, average pay for supermarket and restaurant workers tops $15 an hour‘:
The U.S. labor market hit a new milestone recently: For the first time, average pay in restaurants and supermarkets climbed above $15 an hour. Wages have been rising rapidly as the economy reopens and businesses struggle to hire enough workers. Some of the biggest gains have gone to workers in some of the lowest-paying industries.
And then, on Tuesday, CNN reported that ‘Inflation wiped out America’s pay raises‘:
Companies big and small are raising wages to attract workers and hold onto employees as the economy revs back into gear. But those fatter paychecks aren’t going as far, thanks to rising inflation.In fact, compensation is now lower than it was in December 2019, when adjusted for inflation, according to an analysis by Jason Furman, an economics professor at Harvard University.
For the last decade or so, many economists have bemoaned low inflation, as measured by things like the CPI. They have, in many cases, gone beyond arguing that inflation is a sign of a growing economy (which it might also not be) to arguing that a bit of inflation can help an economy to grow. I confess, I have been a little baffled by this. Remember, it is the real that matters in economics, the nominal is very secondary indeed. Current data for the United States’ economy teaches this lesson once again.