Saturday, February 26, 2011

Wages, PPI, & CPI

The following chart compares the average annual growth in wages over the previous 5 years to the average annual growth in the CPI over the past 5 years.

I'm using "All Employees: Total Private Industries" times "Average Hourly Earnings: Total Private Industries" as an indicator of total wages. It isn't perfect but it is probably close enough.

As seen in the chart, there's fairly good correlation here.

The following chart compares the average annual growth in the "Producer Price Index: All Commodities" over the previous 5 years to the average annual growth in the CPI over the past 5 years.

Once again, there's fairly good correlation here.

Now let's combine the two charts.

The correlation has improved significantly.

Both wages and commodity prices matter when trying to figure out what the CPI will do.

In case you are curious, the optimal correlation was actually 0.825. It was a mix of 47% commodities and 53% wages.

You will note that the CPI has been running cooler than we might normally expect and has been doing so for 15 years. I think much of that can be explained by our willingness to outsource our jobs overseas (in exchange for cheaper goods) and head down an unsustainable trade deficit path. This trend cannot continue forever.

Of course,
shadowstats argues that consumer prices are rising much, much faster than the CPI shows. Why people seem to believe it is another matter altogether.

Source Data:

St. Louis Fed: CPI
St. Louis Fed: PPI: All Commmodities
St. Louis Fed: All Employees: Total Private Industries
St. Louis Fed: Average Hourly Earnings: Total Private Industries


Stagflationary Mark said...

I would also like to point out that much of the inflation of the 1970s was triggered in the 1960s.

Just look at that average annual wage growth from 1964-1969 in the chart (the first data point in the first chart). 8% per year for 5 years? Wow.

Over the same period commodities were only up 2% per year. They sure caught up though!

Stagflationary Mark said...

One more thought.

Do not make me put a trend line through the wages in the first chart. It is bad enough that I can visualize the trend without the line. Ouch.

Stagflationary Mark said...

Yet another thought.

I can't help but think that at least some of the wage growth we saw from 1998 to 2002 (in the first chart) was funneled into commodities from 2002 to 2008 (in the second chart).

If so, this may be hard to repeat.

Mr Slippery said...

Great charts and great insights!

Combining PPI and wage costs was a great idea. Are you using PPI for crude goods or finished? Usually, there is a wave of inflation that hits crude goods first and moves to finished goods.

On private wage declines, it appears to begin with Reagan in 1981. I know he was one of the first to bust a union (air traffic controllers) and private unions have been in decline since. To complete the transition to wage slavery, we added GATT, NAFTA, outsourcing, and now the attempt to bust public unions.

One way to make America competitive again is to force all wages down. We can also devalue the dollar. Both seem to be in play. We could also repeal some EPA regs, but that one might get resistance in Congress.

It looks like the rising wages made the commodity inflation in the 70s more bearable. It is not going to be as easy this time with wages stagnant or declining.

Stagflationary Mark said...

Mr Slippery,

I used the PPI for "all commodities" in an attempt to get as far up the chain as possible.

I was hoping to see a lag between the wages & PPI and the effect on the CPI. I could then use it as an attempt to predict the future. There doesn't seem to be much of a lag though, especially over the last decade.

I strongly suspect we'll be finding even better ways to automate jobs away in the future, if only do to the exponential improvements in computer technology. That should put some additional downward pressure on wages.

Truck Loading by Automatic Guided Vehicle (AGV, LGV,SGV)

The first three comments say it all.

1. there goes more jobs.

2. No automated system is cheaper and more efficient than illegal immigrant employees.

3. Advanced automation will make products cheap to produce domestically again. If you want to drive a forklift you can move to China, unless they adopt this system too.

Stagflationary Mark said...

Mr Slippery,

"It looks like the rising wages made the commodity inflation in the 70s more bearable."

Keep in mind that part of that rise in wage growth was simply due to the rising number of workers.

From January 1970 to January 1980 the number of workers (as seen in the "total private industries" statistics) grew by 2.4% per year on average.

getyourselfconnected said...

I said robots were the next big thing.....

Stagflationary Mark said...


I think robots could be the next small thing.

I'm picturing trillions upon trillions of tiny robots running amok.

This approach proposes the use of biological microorganisms, like the bacterium Escherichia coli.

As if I didn't have enough to worry about! ;)

Anonymous said...

chart says since 1969... is this 5 years or since then?

Stagflationary Mark said...


Each data point on the chart covers the 5 years leading up to that point.

The 1969 data point covers the growth from 1964 to 1969.

The 2011 data point covers the growth from 2006 to 2011.