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It’s been widely assumed that even though very tight U.S. labor markets haven’t yet touched off the kind of wage-price spiral that can supercharge inflation, they’ve been helping consumers offset the effects of rapidly rising prices – and therefore helping to keep living costs worrisomely high.

The intertwined reasons? Because even though when adjusted for inflation, wages generally have been falling since price increases took off in early 2021, rock-bottom unemployment rates and the wage hikes that have been received have enabled healthy consumer spending – and given business unusual pricing power.

Most important, this is what the Federal Reserve believes, and it’s the federal government institution with the prime responsibility for fighting inflation. According to Chair Jerome Powell, “demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time.”

For good measure, Powell said that the labor market “holds the key to understanding inflation” especially in U.S. services industries other than housing, which make up more than half of the set of inflation data favored by the Fed, and where “wages make up the largest cost.”

How come, then, when you look at the wage data put out by the federal government, it’s so hard to find evidence that recent wage levels have significantly bolstered U.S. workers’ spending power during this current high inflation period?

Given the Fed’s power, it makes sense to use the inflation measure it values most – which as RealityChek regulars know is the Personal Consumption Expenditures (PCE) Price Index. As the Fed prefers, we’ll focus on the “headline” gauge, which includes the food and energy prices that are stripped out of a different (“core”) reading supposedly because they’re volatile for reasons having nothing to do with the economy’s underlying prone-ess to inflation.

And for the best measure of the wages workers are taking home, we’ll use weekly wages. What they show is that since the headline PCE rate first breached the central bank’s two percent target, in March, 2021, inflation-adjusted weekly pay (as opposed to the pre-inflation wages Powell oddly emphasizes) is actually down – by 4.60 percent. For production and non-supervisory workers (call them “blue collar” workers for convenience’s sake), real weekly wages were off by a more modest but still non-trivial 3.52 percent.

And this has propped up American consumer spending exactly how?

The Fed actually looks more closely at a wider official measure of compensation than the wage figures. It’s called the Employment Cost Index (ECI) and it takes into account salaries as well as wages, along with non-wage benefits. The ECI only comes out quarterly, and the next one, for the fourth quarter,of last year, won’t be out till January 31. But from the second quarter of 2021 (roughly when headline annual PCE inflation rose higher than that two percent Fed target) through the end of the third quarter of 2022, the ECI for private sector workers) also dropped in after-inflation terms – by 2.39 percent.

But if American workers’ pay isn’t doing much to power their still-strong consumption, what is? Obviously, the answer is mainly the excess savings piled up thanks to pandemic stimulus programs and government measures aimed at…compensating them for high inflation.

When it comes to fighting inflation, there’s good news stemming from the status of these enormous amounts of cash injected into American bank accounts: They’re being run down significantly or are just about gone for everyone except the wealthy. That no doubt explains much of the recent evidence of the cooling of the white hot levels of consumer demand that filled so many businesses with confidence that they could jack up prices dramatically are cooling, and why headline PCE is showing some signs of ebbing.

The bad news remains what it always has – that meaningfully reduced consumer spending, combined with the Fed’s continued stated determination to keep increasing the price of the borrowing that spurs so much spending, could trigger more unemployment, even worse wage trends, and a possibly painful recession.

Yet as I wrote in that above-linked RealityChek post, the $64,000 questions that will determine inflation’s fate remains unanswered: Will recession fears lead the Fed to chicken out, and at least pause its inflation-fighting interest rate increases? And will Congress and the Executive Branch decide to ride to the rescue as well, with new politically popular stimulus programs – which are likely to stimulate inflation, too?  My answer remains a pretty confident “Yes,” which is why my forecast for the economy calls for a short, fairly shallow downturn followed by a significant stretch of “stagflation” – sluggish growth and above-Fed-target inflation.