Average real weekly earnings are down 4.4% in the last 12 months.
by The Wall Street Journal Editorial Board, July 13, 2022
Well, that was ugly. Inflation in June roared to its highest mark to date this year, rising 1.3% for the month and 9.1% over the last 12 months. This means greater declines in real wages and more Federal Reserve tightening that is likely to hit asset prices. No wonder Americans are in a sour mood.
The price increases were “broad-based,” as the Bureau of Labor Statistics (BLS) put it, especially for food and energy. The price index for food at home rose 1% for the month, the sixth month in a row of 1% or more and 12.2% for the last year. Energy prices rose 7.5% in the month, led by an increase in gasoline prices, as every American who has filled a gas tank knows.
Some analysts, including those at the White House, are finding solace because the “core” price index, sans food and energy, rose only 0.7%, or 5.9% over 12 months. President Biden hit this point in his statement Wednesday. But core prices accelerated in June from May, and are up at an annual rate of 8% in the last three months. Inflation can’t be dismissed as largely the result of energy prices and Ukraine.
Oil and gasoline prices have been falling in recent weeks, which offers hope that July’s inflation number will look better. Commodity prices are also down from their peaks. But this is probably also related to declining demand as the global economy slows. Slower growth as the solution to inflation may be inevitable after so many fiscal and monetary policy mistakes, but it’s a tragedy we have come to this pass.
The greatest tragedy is for American workers, who are suffering the largest reduction in real wages since the 1970s. Real average hourly earnings fell 1% in June alone and are now down 3.6% in the last 12 months. Average real weekly earnings fell even more, 4.4%, because of a decline in the average workweek.
Real wages have fallen in 10 of the last 13 months, and they have now fallen more since President Biden took office than they did during the recession caused by the financial crisis. From December 2008 to a trough in real earnings in February 2012, real average hourly earnings fell 1.8% measured in 1982-1984 dollars, according to BLS. They have fallen 4.8% since January 2021.
The policy implications are clear enough. The Fed has every reason to keep tightening. Real interest rates remain negative, and the Fed has only recently stopped adding to its bloated balance sheet.
The Fed downplays the role of the money supply these days. But to the extent the boom in M2 in 2020 and 2021 played a role in inflation, the rate of money growth has slowed dramatically in recent weeks. Monetary policy works with long and variable lags, as Milton Friedman taught, so by that logic today’s tightening will hit the economy in 2023.
This assumes the Fed doesn’t blink if the jobless rate rises and political criticism follows. Our contributors Phil Gramm and Mike Solon point out that when inflation last approached 9%, in 1973, it went on to average 9% for the next eight years. That’s because policy makers lacked the will to contain it.
As for fiscal policy, rising inflation should take more domestic Congressional spending sprees off the table. That includes a slimmed down, $1 trillion version of Build Back Better and the so-called competitiveness bill now in House-Senate conference. The latter’s $200 billion-$300 billion cost, which will add to the deficit, will do more harm than good.
The argument that a tax increase to reduce the deficit would reduce inflation ignores the damage that higher taxes would do to the supply side of the economy. With interest rates likely to rise sharply, the economy will slow and the timing of a tax increase on businesses and the wealthy couldn’t be worse. Senators Joe Manchin and Kyrsten Sinema can do the country a favor by finally ending the Beltway drama over all of this tax and spending.
The return of virulent inflation didn’t have to happen, and the experience should discredit the policies that brought it on. The splurge of spending in 2020 and 2021, under Presidents Trump and Biden, spurred excessive demand. The Fed kept the monetary spigots open for too long, as Washington became enamored with Modern Monetary Theory.
Whatever short-term financial help to Americans that Democrats provided with their trillions of dollars in welfare payments has been more than offset by inflation. The U.S. needs a return to growth economics rooted in stable money, supply-side tax policy, deregulation and fiscal restraint. That agenda hasn’t been as important since 1980.