CEPR

October 11, 2018 (Prices Byte)

By Dean Baker

Workers are now seeing modest real wage growth.

The overall inflation rate in the Consumer Price Index (CPI) slowed to 2.3 percent in September, as energy prices fell 0.5 percent in the month. The drop in energy prices over the last year brought the overall index close to a 2.2 percent increase in the core index. Both indices increased by just 0.1 percent in September.

The lower inflation rate shown in the CPI means that the average hourly wage has now increased by 0.5 percent over the last year. While this is not a large gain, it is close to the rate of productivity growth when adjusted for differences in indices.

Inflation in most areas seems well under control. The core index, excluding shelter, increased just 1.4 percent over the last year. The shelter index has risen by 3.3 percent over the last year and continues to be by far the most important factor driving inflation.

While there is little evidence of any slowing in the shelter index overall, there are large divergences across cities, and rental inflation has slowed sharply in some cities. For example, in Washington, DC, rental inflation had peaked at 3.5 percent in 2015. It is now down to 2.0 percent over the last year. In San Francisco it peaked at 7.2 percent in 2017. Over the last year rent has risen by 3.7 percent.

By contrast, rent has increased by 6.5 percent over the last year in Seattle, little changed from its peak rate of 6.7 percent last year. Chicago is also now seeing rapid increases in rents, with a rental inflation rate of 3.8 percent over the last year. That is up from rates slightly over 2.0 percent in 2017. (These figures refer to owners’ equivalent rent of primary residence, which excludes the effect of utility prices.)


Outside of rents, inflation seems to be edging lower. Prescription drug prices fell 0.2 percent in September and are up just 1.2 percent over the last year. It is important to remember that this index reflects the prices of drugs that are already on the market, it is not affected by new drugs, which are introduced at high prices. The overall medical care index rose 0.2 percent in September and is up 1.7 percent over the last year.

New and used vehicle prices both fell in September, by 0.1 and 3.0 percent, respectively. Over the last year the former have risen by 0.5 percent, while the latter have fallen by 1.5 percent.  Apparel prices rose 0.9 percent in the month, but that followed a 1.6 percent drop in August. They are down 0.6 percent over the last year.

Car insurance prices rose 0.8 percent in September after being flat in August. This component, which has been a major driver of inflation, has increased by 6.6 percent over the last year. College tuition prices rose 0.1 percent for the month and are up 2.4 percent over the last year.

Air fares have also been a driver of inflation in recent months. They rose 1.0 percent in September, after increases of 2.7 percent and 2.4 percent in the prior two months, bringing their annualized rate over the last three months to 14.4 percent. Nonetheless, airfares have actually fallen by 0.4 percent over the last year. While these data are seasonally adjusted, it seems that there are new seasonal patterns that are not being fully picked up by the adjustments.

The annualized inflation in the CPI over the last three months (July, August, September) compared with the prior three (April, May, June) was 2.0 percent. For the core index the annualized rate was also 2.0 percent, a modest slowing from the 2.2 percent rate over the last year.

If the core inflation rate stabilizes near 2.0 percent, and there are no further spikes in energy prices, it will mean that real wages will be rising at close to a 1.0 percent annual rate going forward. While this is not enough to make up the ground workers lost in the downturn, it should mean that workers are seeing improvements in living standards. This is especially true of workers who own their homes and do not see the increase in rental inflation.