Tyler Cowen points to a new paper today that reminds me of something:
We argue that workers must take costly actions (“conflict”) to have nominal wages catch up with inflation, meaning there are welfare costs even if real wages do not fall as inflation rises.... The impact of inflation on worker welfare is determined by what we term “wage erosion”—how inflation would lower real wages if workers’ conflict decisions did not respond to inflation.
This is the usual understanding: inflation erodes wages and then workers struggle to catch up. But that's not what happened this time around:
After the pandemic, wages outpaced inflation substantially. Inflation later clawed back some of the increase, but wages never fell behind CPI. And thanks to a tight labor market, after 2022 wages quickly started outpacing inflation again. There was never any wage erosion.
In any case, I'd offer a different and more obvious explanation for dislike of inflation: rising prices stare you in the face but rising wages are quickly forgotten. Plus people are bad at math. And higher wages always seem like the well-deserved fruits of hard work, while higher prices are the demons constantly trying to take them away.
NOTE: I'm using the Atlanta Fed Wage Tracker for wages because it's more accurate than the usual BLS numbers, which suffered in the early stages of the pandemic from composition effects (i.e., low-wage workers were laid off more, which removed them from the average and made it look like wages were spiking upward). The Atlanta tracker compares the same workers from year to year, and also provides median figures, which eliminates outlier effects.
If you haven’t changed jobs or received a big promotion in the last few years, your wages or salary is unlikely to have kept pace with inflation. Everyone I know in this situation is down at least five percent in real terms, including myself and my colleagues.
this is almost always true. not a new devlopment.
Ding ding ding! Yep.
The Atlanta Fed says you're wrong.
Citation?
See story above.
If you are a federal, state, city, or county employee or in a union your wages are almost always adjusted for inflation. If you are in a minumum wage job or in a workplace with some minimum wage jobs in most places your wages have gone up much more than inflation in the past few years.
There's an even more specific psychological phenomenon at work here. I like to call it "Bad is Stronger Than Good". The thesis is that a "good" effect has to be about 3 times as big to outweigh the salience of a "bad" phenomenon.
There's considerable evidence behind this phenomenon. It's worth knowing about. This is how humans are built.
But Fox will only talk about how prices are so much higher now.
Tell em what they NEED to hear, that unless we want to put 15 million folks out of work, even Donnie's economy can never get us back to pre covid prices.
Welcome to (not so free market) capitalism
And yet, the single biggest payment for the majority (vast majority?) of households is housing. And housing has outpaced inflation by a multiple of 2.4 since the 1960s - but we haven't changed how inflation is calculated. CPI only weights housing costs at around 1/3 of the measurement. Given that a majority of renter households in the US (as of 2023) are housing-cost burdened (paying more than 30% of their gross income towards rent) and that the proportion of homeowner households who are housing-cost burdened has been rising, and that this shows no signs of abating, the weight given to housing in inflation measures should be adjusted upwards.
Doing so would decrease (if not eliminate) the alleged gains wages have been against inflation, particularly in the last 10 years as housing costs shot up even faster relative to inflation. And that would jive with the vibes.
Seems pretty obvious to me.
the math here doesnt seem as obvious as you make it out to be.
You cited several guesstimate figures and doing the math with your guesstimates, it doesnt look like housing costs are underweighted at all.
Given your numbers plus the fact that something like 25% of americans have no mortgage and pay no rent, shelter might be very overwieghted.
This 25% is a very large number and makes your math very hard to work out like you want it.
But your making an emotional argument, not a fact based argument. And housing is too expensive.
I'd be more convinced if you'd set January 2020 as the starting baseline index = 100.
Also: prices were flat (as compared with now) for over 10 years after the 2008 recession, so people got used it.
A notable difference over the last few years is that wages for lower income Americans are rising very strongly.
I suspect this plays a large role in the chosen narrative. Low wage earners are never, ever writing these stories and not pushing theelse narratives.
Many important people get very uncomfortable with wage gains at the bottom.