Income Versus Inflation
I am often asked what economic data we assess to determine our view on the economy. One measure that we believe makes sense to monitor is wage growth versus inflation.
When wage growth is growing at a pace higher than inflation, this suggests that an economy is still growing and likely not to dip into recession. The current data suggests that this may be the trend. If we begin to see a narrowing of the gap between wage growth and inflation, it is something of note to consider when making investment decisions.
We believe constructing a diversified portfolio, including staples assets, but we still invest in growth-oriented positions as there is evidence to suggest that the economy continues to progress along at a remarkable pace.
There’s a reasonable chance the economy will slide into not a mild recession. The odds, however, are lower than they have been in the past as a data continues to suggest an expanding economy.
Note the chart below. It shows the pace of wage growth relative to inflation. Also note excerpts from a recent article. It may provide additional insight on this topic.
"Workers are winning. Hourly wages rose 0.6% in January from the previous month and are up 4.5% from a year earlier — outpacing inflation.
Why it matters: The pay numbers, part of an absolute banger of a jobs report released last Friday, are another sign that the labor market is strong and workers, in some industries, still have leverage.
State of play: Wages have been outpacing inflation since last May, but for the two years before that the situation was reversed.
- "Wages still have some catching up to do," says Julia Pollak, chief economist at job site ZipRecruiter.
Yes, but: Some economists think the January wage number may be a little too rosy.
- Hourly earnings might have been higher last month, in part, because of a decline in the number of hours worked, per notes from BofA Global Research and Goldman Sachs.
- And, there are some other worrying signals that wage growth could be slowing, Pollak says. The pay offered in job postings has come down substantially over the past year, according to ZipRecruiter's data, she says.
The bottom line: Wages are beating inflation, but economists don't think it's a worrying sign of a brewing wage-price spiral. If anything, some are expecting wage growth to moderate a bit in the coming months.”"