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By New_Deal_democrat November 5, 2014 10:12 am
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Falling commodity prices + rising wages = more growth ahead

The simple fact is, economic downturns almost always happen because consumers decide to retrench, and pull back on spending.  Furthermore, it is usually because prices have grown more than wages that drives their decision to retrench.  Indeed, where commodity prices are falling, but wages are rising, there has simply never been a recession.

So the rapid decline of gas prices to less than $3 a gallon, in the face of wages for nonsupervisory workers growing at 2.2% rate (and likely to improve in coming months), is as close to purely good economic news there is.

First, let me show you consumer prices YoY vs. average wages for nonsupervisory workers YoY for the last 50 years (positive:means prices rising faster than wages):

Every single recession in the last 50 years has been preceded by a period of prices rising as much as (1969 and 2001) or more than (all the other times) wages. Sometimes, rising prices haven't meant a recession, due to strategies like refinancing at lower interest rates, But there has simply never been a case of prices not rising as much as wages giving rise to a downturn.

Now let's zoom in on the last 5 years:

While wages have been rising at a very low rate, since 2012, consumer inflation has been rising at an even lower rate YoY.

Now let's compare commodity prices with consumer prices.  Almost always, commodity prices have been more volatile than consumer prices:

Let's zoom in on that relationship over the last 5 years:

And when we look at the monthly change since the beginning of 2013, here's what we get:

I don't know how long the big decline in gas prices is going to last.  But so long as it does, both commodity prices and consumer prices are going to grow less than wages.  That is good for consumers and good for the economy.  It's about as simple as that.

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