Inflation vs. wages: Inflation is winning

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Cool for the winter

Inflation finally showed some evidence of cooling last week, as the October inflation report showed consumer prices rising 7.7%, down modestly from the 8.2% figure seen in September, and the 9.1% print from early summer.

That’s good news for pretty much everyone. Markets showed their support with the best one-day showing for US stocks since 2020. The flagship S&P 500 Index rose more than 5% at the end of last week, as investors anticipate a slower pace of interest rate rises from the Federal Reserve.

Keeping up with the inflation

If you’d told someone 2 years ago that markets would celebrate annual inflation north of 7%, they almost certainly wouldn’t have believed you. Whilst this is good news, it’s easy to forget that prices are still rising, just more slowly — on a monthly basis, the CPI rose 0.4% in October from September.

Indeed, the question most people care about — "is my paycheck keeping up with inflation?" — has a slightly less-cheery answer. The latest hourly compensation data showed real hourly compensation declined 3.4% year-on-year in the third quarter of 2022, which was the largest decline since data collection began in 1948. Inflation might be cooling, but wages are still falling behind.

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