Raises in real earnings help offset price increases but not all consumers share the benefits equally.
The closely-watched consumer price index for June was released Thursday morning, and fell by 0.1% from the previous month, the first time that’s happened since May 2020. Meanwhile, real earnings were up by 0.4% during the same period. With all the “Will they? Won’t they?” speculation of Federal Reserve interest rate cuts folks have been doing of late, it’ll be welcome news to markets if inflation has continued to decline from May’s annual rate of 3.3%.
It’ll be welcome news for consumers’ pocketbooks as well, especially as incomes have continued to rise at a healthy clip, offsetting prices increases and then some. In the latest month, June, average hourly earnings rose by 3.9%
Inflation peaked at 9% a year in June 2022, blowing way past wages, which never grew by more than 6%. But by May of last year, real earnings — that’s the purchasing power of wages after accounting for price increases — were gaining ground month-after-month.
“Some consumers tell us that their income gains have outpaced inflation,” said Joanne Hsu, director of the University of Michigan consumer surveys.
Yet that hasn’t improved sentiment much, she said. “Those gains have been heavily eroded by continued inflation, and specifically continued high prices.”
And those higher prices have taken a toll on consumer spending.
“We’re seeing some caution, pulling back from discretionary items when they have the ability to do so,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.
The top third of earners have become more optimistic. But Hsu noted that most middle- and lower-income consumers are just trying to catch up, and see little prospect of getting ahead.
