Rising Prices And Stagnant Wages Are Real
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Rising Prices And Stagnant Wages Are Real

Inflation is real. Stagnant wages are real. And the result is a lower standard of living for tens of millions of working American families.

Those are all facts. Unfortunately, AEI’s Mark Perry and Jim Pethokoukis didn’t agree with my presentation or the implication of those facts.

Earlier this week, I wrote a long piece detailing how the prices of a number of major goods and services are growing faster than average wages. The result? The budgets of working families are being pinched, and their standard of living is slowly eroding.

Perry and Pethokoukis took issue with my analysis. Pethokoukis’ response was a bit odd, especially given my original critique of his tic of indiscriminately defending or praising the Federal Reserve regardless of the major issue at hand:

So what is the reality of inflation right now? Over the past 12 months through June, the headline Consumer Price Index has increased by 2.1%. The core CPI, excluding food and energy, has increased by even less, just 1.9%.

[...]

The Fed hasn’t caused a sudden surge in food prices — just like monetary policy isn’t responsible for rising college costs. Now this sort of inflation is painful for many Americans, especially when wages have been going nowhere. But the financial state of middle-class America would be even worse off if the US had followed the deflationary, hard money policies that the inflationistas would apparently prefer. The European Central Bank hasn’t engaged in the sort of monetary easing that the Fed has and that many on the right detest. The result has been a eurozone unemployment rate near 12%, and a recovery (including a double-dip recession) that makes America’s look like the Reagan boom. It is also worth noting that Americans “budget less of their spending on food prepared at home last year than consumers in any other country in the world,” according to my AEI colleague Mark Perry.

In a discussion about whether family budgets are being pinched by higher prices, it makes as much as sense to talk about "core CPI," which excludes food and energy costs, as it does for a doctor to tell you you're perfectly healthy...just so as long as you ignore all those diseases you have.

But then we get to his real argument: that whatever's happening, higher prices aren't the Fed's fault. It's a strange defense, given that just about everything the Fed has done since 2008 has been done for one reason: to raise prices. The central bank's zero interest rate policy, or ZIRP, was not instituted to make deflation more likely. QE1 was not implemented to decrease prices. QE2 was not implemented to decrease prices. QE3 was not implemented to decrease prices. It's not conspiracy mongering to point out that what's happened -- higher prices -- happened precisely because the Fed wanted...higher prices. Is the Fed the only reason for higher prices? Of course not. But it's clearly a factor.

Interestingly enough, I never even criticized the Fed in my initial post. The only time I mentioned the central bank was to note that Pethokoukis was one of its chief apologists, and that his economic analysis was often clouded by his stance toward the Federal Reserve. And in his response, he addressed my argument that rising prices and stagnant wages were a serious problem by...defending the Fed.

And then there's Mark Perry. Perry did not like my post either. He especially did not like that I highlighted the rapidly rising prices of food items like fresh fruits, dairy, eggs, seafood, pork, and beef:

Now it’s Davis who is using an “inexplicably bizarre method” of picking six food categories to supposedly demonstrate that “food prices have soared” from September 2013 to May 2014 (June data only became available today). Here’s the problem with that “inexplicably bizarre method” — the overall CPI for All Food Items increased by only 2% from September 2013 to May 2014 (with beverages it was only 1.9%, and for food at home by 2.3% as Davis reported)! Therefore, Davis’s chart makes food inflation look artificially high by picking six food categories that all increased multiple times the 2% increase in the CPI: Food (and 2.3% for food at home).

There’s another issue with the Davis analysis – average hourly wages according to this measure increased from $20.21 in September 2013 to $20.58 in May 2014, which is a 1.6% increase. And that leads to another problem — the overall CPI increased by 1.4% between September last year and May this year, which was less than this 1.6% increase in average hourly earnings (and the same as the 1.4% wage increase used by Davis). In other words, average nominal wages by one measure increased slightly greater during that period than did overall consumer prices, meaning that real wages increased. For the measure Davis uses, real wages were flat, but not declining.

Setting fresh fruits aside, what do dairy, eggs, seafood, pork, and beef all have in common? Why might I have picked those five major items? If you guessed "because they're major protein groups, typically present at every meal, and typically the most expensive portion of any meal," you'd be right! When discussing strained family budgets, focusing on major items makes sense. It's why I also included the high costs of health care, education, and gas.

Then, after criticizing me for "selectively" noting the rising costs of the major protein categories according to BLS, Perry decided to show me what's up by...highlighting the falling costs of grapefruits and strawberries and apples (which, last time I checked, were all fresh fruits, a major category I included in my analysis). And never mind that my original post explicitly included the price growth of all food prepared at home:

Overall, the prices of food at home are up 2.3 percent, while average hourly wages are up only 1.4 percent. In other words, food prices are growing 64 percent faster than wages.

But that section of Perry's post is nothing compared to the one where he attacks my point that prices are growing faster than wages. Perry wrote:

There’s another issue with the Davis analysis – average hourly wages according to this measure increased from $20.21 in September 2013 to $20.58 in May 2014, which is a 1.6% increase. And that leads to another problem — the overall CPI increased by 1.4% between September last year and May this year, which was less than this 1.6% increase in average hourly earnings (and the same as the 1.4% wage increase used by Davis). In other words, average nominal wages by one measure increased slightly greater during that period than did overall consumer prices, meaning that real wages increased.

What measure did Perry use to prove me wrong and show that wage growth was actually outstripping price growth? He looked at the average hourly wages of "production and non-supervisory employees." According to BLS, nearly 97 million American workers fit in that category. Pretty broad right?

The only problem for Perry is that the wage measure I used was the broadest one possible -- "average hourly earnings of all employees" -- and one that encompasses the average hourly wages of nearly 139 million American workers. In order for Perry to claim that real wages are actually increasing, he had to...exclude the wages of 42 million workers.

I guess it's not enough for Perry to tell American families to "stop whining" about the fact that their standards of living are declining. He apparently also feels compelled to pretend tens of millions of them don't even exist. If that's not a foolproof strategy for political success, I don't know what is.

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