Inflation, US Economy

Inflating Wages

By, 11/18/2006

One of our favorite pastimes is delivering bad news to the bears in times we believe it's a bull market (like now). Bad news for bears means good news for bulls. We encounter a great deal of news each day—both bullish and bearish. A vital part of portfolio management is coming to the right conclusions with the right data in order to tease out the truth—and never to trust reported data unless you can verify it yourself. Said another way, the data you make decisions on must be accurate. Even the best logic will fail if your data is wrong.

A recent report from a prominent financial institution makes the claim that real wage growth in the US has hit an eight-year high. Sounds great, but is it true? Essentially, we must try to answer this question: what is "real" wage growth in the US today? That is, what has wage growth been less the rate of inflation? (We must consider inflation because it affects the relative purchasing power of each dollar earned.)

This much is true: wages are clearly trending upward. The Wages and Salaries report grew 7.6% year-over-year in the most recent period. But what about inflation?

Current inflation figures for headline CPI (consumer price index) came in far below expectations. As a matter of fact, the report indicated consumer prices actually dropped! (This is the metric used by the report we're trying to corroborate.)

However, the "headline" rate is not the best metric to use in making a wage growth assessment. Headline inflation is quite volatile, and thus isn't generally a good metric for gauging the true rate of inflation or a consistent trend as it relates to wages. If you exclude highly unstable items from the report like gasoline and food, you get what is referred to as the "core" inflation rate. Core CPI is a more consistent measure and currently shows a rate of about 2.8%. Thus, to get the true rate of real wage growth, the calculation is simply:

7.6% (Wages and Salaries growth) – 2.8% (Core CPI) = 4.8% (rate of real wage growth)

This is not as robust as the "eight year high" in wage growth we read about. However, in verifying the data for ourselves, we can confidently conclude that real wage growth is indeed positive in the US. The data still point to a healthy US worker—more bad news for the bears.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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