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By New_Deal_democrat September 17, 2014 3:11 pm
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Loosening Oil choke collar + higher nominal wage growth = improving real wage growth

One of my bigger themes over the last few years has been how much the secular rise, and then plateauing, of the price of gas, has impacted the economy.  Briefly, gas went from under $1 a gallon in 1998 to $4.25 a gallon in 2008.  Although not so sudden as the two "oil shocks" of 1974 and 1979, the end result was a similar impact of consumers' wallets.

When gas prices plummeted to about $1.40 a gallon at the end of 2008, they heralded an upturn in consumer spending which was one important contribution factor to the recession bottoming out in mid 2009.

Since then, the change in the price of gas has continued to have a large behind-the-scenes affect on consumers and the economy, the latest demonstration being this morning's -0.2% decline in the CPI.

First, let's look at the YoY% change in the price of gas (green, divided by 10, better to show the trend) and compare it with the YoY% change in CPI (red) for the last 5 years:

It's easy to see that changes in the price of gas have largely determined the trend in the overall CPI.  With gas prices actually falling YoYfor most of the last two years, the inflation rate has remained tame.

Now let's compare the same YoY% change in the CPI (red) vs. the YoY% change in average hourly wages (blue):

While nominal average wage growth fell from 3% before the last recession all the way down to only +1.5% in 2012, and have slowly increased since to nearly +2.5% YoY, fueled by the sharp increase in gas back over $3 to nearly $4 a gallon in late 2011 and 2012, inflation rose even faster than wages.  Since then, the slow decline in gas prices has meant that wages have risen faster than inflation.

The net result is that after falling about 3% from their end-of-recession peak, real hourly wages bottomed in 2012, and have made up about 2/3 of the loss.  

 

 

If the slightly improving trend in YoY wage growth continues with less slack in the labor market, and if the Oil choke collar continues to slowly disengage, we could see a new 35 year high in real wages within the next six months or so.

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