Average Weekly Earnings - May 2009

The U.S. Bureau of Labor Statistics (BLS) reported today that the average weekly earnings of private Americans fell by 0.3% from April to May. What does this mean for ECONtrepreneurs who monitor changes in the broader economy and its effects on their personal economies? Let's explore this in light of other recent economic news.

To begin, Average Weekly Earnings is an Economic Indicator (see May 8th post). From this we speculate on take-home pay trends for average workers. Average Weekly Earnings are reported monthly along with the Employment Situation Summary, also published by the BLS.

The Consumer Price Index (CPI), also from the BLS, was released today as well. For simplicity, the CPI is synonymous with inflation. The CPI is a gauge to determine if Americans are paying more or less for the same goods/services as they were last month or last year. Consumer prices in May increased 0.3%.

So earnings are shrinking and prices are rising. If this trend continues, your consumer spending could be threatened! You may not be able to buy the same quantity (and quality) of goods and services you previously could, although your paycheck is the same amount. In layman's terms, situations where there is too much money chasing too few goods, causing the price level to increase are called inflationary. Conversely, situations where there are too many goods and not much money, causing downward pressure on prices are called deflationary.

Thankfully, we are not experiencing neither inflation nor deflationary effects yet. But the threat of both linger. The Federal Reserve, America's central bank headed by Ben Bernanke, is responsible for monitoring inflation levels. If prices continue to rise unchecked, inflation is well on its way to a reality near you.


Let's dig a little deeper into the CPI figure. Total CPI rose 0.3% from April, but core CPI rose only 0.1%. Core CPI does not include food and energy prices. Why? These products are considered volatile and susceptible to wild fluctuations. If the supply of oil or corn is restricted, the prices of these commodities changes immediately and drastically. Taking these components out leaves us with a more stable rate: the core inflation number. Keeping food and energy prices in the CPI number is called headline inflation, because it does just that: makes news headlines!

According to Federal Governor Kevin Warsh, the risks aren't as prevalent as many would have us to believe:

The recent data on inflation shows that the risks of deflation, which entered the minds of many central banks around the world over the last 18 months...seem to be significantly attenuated. [Inflation dynamics are] "closer to a zone of price stability....

Warsh is undoubtedly looking at the bigger picture. While headline inflation is up, core inflation not so much so. And, looking at CPI figures from the same time last year, inflation levels are lower in 2009. Core inflation is steady, but headline inflation is a little trickier. Energy prices - specifically gasoline prices - increased in May but not like we're used to seeing this time of year (Memorial Day usually kicks off the summer driving season; when people need or demand more gas, the price of gas will rise). Here at The Delasol Group we anticipate June gasoline prices to be higher, thus contributing to a higher headline CPI number next month. However, American productivity is lagging and more modest GDP numbers will likely keep core inflation in check as well.