Americans See Real Earnings Fall

Posted In: CPI, Commodities, Consumer Prices, Consumers, Economic Indicators, Economy, Energy, Food, Gasoline, Home Prices, Housing, Inflation, Natural Resources, Oil, Stimulus Package, U.S. Government, Wages

This past Wednesday, Associated Press business writer Ellen Simon wrote “Workers see inflation-adjusted earnings fall 1.2% for year” in USA Today. Simon reported that inflation-adjusted earnings for the average American worker have fallen 1.2% over the last year, according to the Bureau of Labor Statistics. Higher food and fuel costs have contributed to this erosion in purchasing power, she said. According to the BLS, real earnings (earnings adjusted for inflation) fell in 8 of the last 13 months and were down 0.5% in January compared to the previous month. Dean Baker, co-director of Washington-based research group the Center for Economic and Policy Research, said:

A lot of people have lost a huge amount in their homes, jobs aren’t being created at a rapid rate and wages are falling behind inflation. Workers, in this environment, can’t keep up their consumption. It’s bad for them as far as their living standards, but this is also a serious source of drag on the economy.

Baker told the AP reporter that a consumer pullback in spending could offset Washington’s economic stimulus plan, “But we’d be in even worse shape without it,” he added.

According to Ms. Simon:

Average weekly earnings were $592.74 in January, or roughly $30,800 a year. While that’s about $1,000 a year more than workers averaged in January 2007, inflation has increased at a rate of 4.3% for the same period, outpacing the 3.2% earnings gain.

At the same time, I am not a fan of the “official” consumer price index (CPI) measure because it was heavily manipulated over time (especially during the Clinton administration), with methodological changes that understate inflation. I prefer using the “traditional” measure of inflation (pre-Clinton), which can be calculated by adding 7% to the “official” CPI number (per John Williams’ Shadow Government Statistics), and leaves us with “real” inflation of around 11.3%. This high rate of inflation could explain why I am encountering comments like the following on a much more frequent basis in my everyday research:

I’m confused, everybody keeps telling me the economy is great and I’m not suffering by paying 50% more for my food, clothing and everything else while my pay stays the same. Who should I believe, all those experts or my empty bank account?

-Reader comment, USA Today, February 22, 2008

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