INFLATION: IF IT BLEEDS IT LEADS
By normal standards, the U.S. economy continues to look very good. Unemployment has now been below 4% for 27 months, and inflation remains fairly low, albeit somewhat higher than the Federal Reserve’s target of 2%. But if you say that, you get a lot of pushback.
Some of the pushback comes from readers who are, if anything, to the left, and say something like this: “Well, maybe the economy is strong, but all the gains have gone to people at the top.” Or “official inflation may be low, but prices of essentials like food and energy have hugely outpaced wage gains.”
Let’s start with the claim that recent growth has benefited only the affluent. Not many people seem to know this, but the truth has been nearly the opposite. Since the pandemic, wages for lower-paid workers have risen substantially faster than wages for the highly paid, a phenomenon David Autor, Arindrajit Dube and Annie McGrew call “The Unexpected Compression.”
But, you may say, maybe wages are rising faster at the bottom, but inflation also hits low-wage workers harder. That’s a reasonable objection. But how big an issue is it?
The Bureau of Labor Statistics regularly publishes estimates of typical weekly earnings at the 10th, 50th and 90th percentiles of the wage distribution, and it also publishes estimates of consumer prices for the bottom, middle and top quintiles of the income distribution, which roughly correspond.
Yes, inflation has run somewhat higher for lower-income Americans, probably because they spend a higher proportion of their income on food and energy. But the difference in inflation has been swamped by the difference in wage growth.
So the claim that lower-income Americans have been hurt worse by inflation isn’t supported by the facts.
Still, haven’t the prices of essentials like food and energy risen much faster than wages? While it’s true that these types of goods might have a relatively high influence on how inflation affects lower earners, the full answer may surprise you.
First, let’s look at how the prices of food at home — groceries — compare with the usual weekly earnings of the median worker. Food prices were low relative to wages during the worst of the pandemic, then shot up as the economy recovered.
At this point, however, the typical worker’s purchasing power in terms of food is about what it was in early 2019, when, as I seem to recall, a guy named Trump was boasting about how great the economy was.
What about energy? The price of a gallon of gasoline as a percentage of usual weekly earnings fluctuates a lot — it, too, spiked when Russia invaded Ukraine — but at this point it’s more or less in the same range it was in for much of the late 2010s.
So tales of Americans struggling to cope with sky-high prices, both of goods in general and of essentials, don’t seem to match the data.
Why, then, do so many people believe otherwise? One answer may lie in a new report by Ryan Cummings, Giacomo Fraccaroli and Neale Mahoney, writing for the website, Briefing Book Their report, titled “Bad news bias in gasoline price coverage,” shows that there are far more TV news reports about gas prices when they’re high than when they are low.
The authors don’t do the same exercise for food prices, but I have no doubt that the same phenomenon is true there as well.
This bad-news bias needn’t reflect partisanship. Much of it probably reflects the old adage “If it bleeds, it leads.”
But why should this bias be worse now than in the past? It seems clear that we’ve had a lot more wild price swings than usual in the aftermath of the COVID-19 pandemic. And given badnews bias, this could lead to a perception that inflation is worse than it is.
Anyway, food for thought — food that’s probably more affordable than you imagine.