Wages: Deflation Early Warning?

Just a quick note.

I received the Bureau of Labor Statistics press release on wages this morning and one thing jumped out at me: during the second quarter average [median] wages rose to $740 a week. That’s up 0.8% on last year. But inflation rose 1.8% over the same time. This means that real wages – adjusted for inflation – actually decreased by 1.0%.

That’s not good news.

Keep this up and we are in for some serious trouble.

Declining real wages are a telltale sign of the onset of deflation. Anyone tracking the core inflation rate would have seen that the monthly figures have been dropping. That 1.8% for the last year is shrinking, not increasing. And with wages also shrinking in real terms, it is little wonder that consumers feel pinched into a defensive mode. This is exactly the self fulfilling decline that we have feared. Stopping an economy from settling into a vicious downward spiral is devilishly difficult, and expensive. The amount of stimulus needed to reverse course once deflation has become the norm is much greater than the amount needed when inflationary expectations are still strong: not only do you need to fill the demand gap, but you need to plug the drop in goods and wage prices as well.

While this morning’s news does not imply that we are actually in a deflationary economy, yet, it is a grim early warning that we need to do something quickly to avoid the drop.

This is definitely not good news.