Inflation Is Eating Away Worker Wage Gains

For the second month in a row, annual inflation fully offset workers’ average hourly wage growth inflation hit its highest rate in more than six years, with consumer prices eating away at modest wage gains by American workers and underscoring questions about how much they are benefiting from an economy that by many other measures is booming.

The consumer-price index, which gauges what Americans pay for everything from veterinarian services to baby clothes, rose a seasonally adjusted 0.1% in June from the prior month, the Labor Department said Thursday. Excluding volatile food and energy components, so-called core prices increased 0.2%. Economists surveyed by The Wall Street Journal had expected a 0.2% uptick from May for both the overall index and core inflation.

Prices rose 2.9 % in June from a year earlier, the fastest pace since February 2012. Core inflation ticked up to 2.3 % over the past 12 months, the highest rate since January 2017.

In June, for a second month in a row, annual inflation fully offset average hourly wage growth over the previous year. That left workers’ real hourly earnings flat over the 12-month period despite falling unemployment and a strong economy even as workers made up for higher prices by clocking slightly more hours a week in June.

Production and nonsupervisory employees, a category which includes blue-collar workers, saw their real average hourly wages fall 0.2 % in June from a year earlier after a similar slip in May.

“It’s the boiling-frog metaphor,” said Marc Hall, a 58-year-old writer and corporate-communications specialist at a software firm in Rockville, Md. “You notice it a little at a time, here and there, and then at the end of the year, you say, ‘Yeah, things went up a lot, didn’t they?’”

Mr. Hall said that while he received a 2 % pay raise in the past year, he senses that his earnings haven’t kept up with the cost of living, adding, “It’s a net loss.”

Economists estimate gross domestic product grew in the second quarter at one of the fastest clips measured since the recession, while corporate tax cuts enacted at the end of 2017 likely fuelled record earnings by publicly traded U.S. companies, analysts say.

“Wage growth remains surprisingly weak,” said David Kelly, chief global strategist at J.P. Morgan Asset Management, in a note to clients earlier this week. “The remarkable ability of firms to lure more workers back into the labour force and get stronger productivity gains from them without raising wages is a clear positive for profits.”

The absence of real wage growth over the past year contrasts with the norm earlier in the expansion, when significantly lower inflation meant that even a modest raise afforded workers real wage gains. During most of 2015, for example, real hourly wages rose 2% or more in annual terms while a collapse in commodity prices depressed inflation.

The year-over-year rise in prices last month was led by energy commodities on the heels of a sharp increase in oil prices earlier this spring. Gasoline prices rose a seasonally adjusted 0.5% in June from May and 24 % from a year earlier, the CPI report showed. Separate data from the U.S. Energy Information Administration showed the average price for a gallon of regular gasoline rose to USD 2.89 last month, the highest price for June since 2014.

In a sign of how higher energy prices may ripple across other sectors in coming months, Delta Air Lines Inc. said it would raise fares and add fewer flights than planned. While the carrier posted record sales in the second quarter and increased its dividend by 15 %, it also signaled that fuel costs are likely to weigh on profit for the rest of the year.

“With higher fuel prices you’re going to expect to see ticket prices go up as well,” said Chief Executive Ed Bastian in an earnings call.

Prices for other goods and services also increased.

Shelter and rent costs, which account for about a third of overall consumer spending, rose 0.1 % in June from May and were up 3.4 % from a year earlier. Prices for medical-care services rose 0.5 % from May and 2.5 % from June 2017. And food prices rose 0.2% last month from May, though the annual increase in this category was more muted at 1.4 %.

For many economists, accelerating inflation suggests the economy is behaving more or less as it should after years of fitful expansion that has brought the jobless rate near its lowest levels since the 1960s.

A separate inflation measure favored by the Federal Reserve, the personal-consumption expenditures price index, showed consumer prices rose 2.3 % in May from a year earlier, and core prices rose 2 %. Fed officials seek 2 % inflation because they think that pace is consistent with a healthy economy.

Firming inflation and low unemployment have bolstered Fed officials’ case for gradually raising short-term interest rates to keep the economy from overheating. They have lifted rates twice this year and penciled in two more increases by year’s end.

At their most recent rate-setting meeting, in June, Fed “participants generally agreed that the economic expansion was progressing roughly as anticipated, with real economic activity expanding at a solid rate, labour market conditions continuing to strengthen, and inflation near the Committee’s objective,” according to meeting minutes released last week.

Economists said Thursday’s data generally supported their view that inflationary pressures are gradually picking up.

But, one important question, they say, is how far the Trump administration will take its escalating trade disputes with other countries. The White House, which imposed tariffs on $34 billion of Chinese exports of industrial goods like auto parts and electronic components, said this week it would assess 10% tariffs on an additional USD 200 billion in Chinese consumer goods. The administration also has imposed tariffs on imported steel and aluminium from the European Union, Canada and Mexico, leading those countries to set their own tariffs on U.S. exports.

The impact of such tariffs, wouldn’t be negligible, economists say.

Tariffs on washing machines imposed by the White House in January caused the CPI’s “laundry equipment” category to increase 13 % over the 12 months through June.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the Chinese goods subject to the newly proposed tariffs account for almost 6 % of the core CPI, meaning that a 10 % levy would lift the index by up to 0.6 percentage point.

“The latest proposed tariffs would significantly boost core inflation,” Mr. Shepherdson said in a note to clients. “People will seek to be compensated for the squeeze on their real incomes as a result of higher prices, and their chance of being able to force employers to pay up is better now than at any time since the crash.”