As a millennial, Connor brings a new perspective to the world of economics, delivering ITR’s industry-leading accuracy to current C-suite executives while forging connections with the next generation of business leaders.
Most see "inflation" as a dirty word, indicative of weakening spending power and the diminishing purchasing capability of a fixed number of dollars, both of which are technically true. However, what really matters for most consumers – i.e., those in the workforce – is inflation relative to wage growth.
Inflation, of varying rates, is a statistical norm. In the US, outright deflation, or a general reduction in price levels, is a statistical abnormality on a Consumer Price Index basis. Price levels generally rise over time; that is simply the world we live in. The relationship between inflation and wage growth is what is worth watching. Most would regard an inflation rate of, say, 2.0% as relatively benign and generally healthy and acceptable. However, if wages are only up 1.0% during the same time period, purchasing power is actually moving backward. Conversely, an inflation rate of 5.0% would be viewed as quite hot, particularly in the 21st century, but if wages are growing at a higher rate, then purchasing power is still on the rise.
I lay that foundation simply to illustrate the nuance required when examining inflation in a macroeconomic context. Inflation is not always a problem, but it certainly can be. Currently, the US Consumer Price Index is up 6.2% compared to the same month last year, the most robust inflation in more than 30 years. Inflation is clearly more intense in 2021 than what we have grown accustomed to in recent times.
Wage growth kept pace with and outstripped price increases in 2020 and most of 2021; however, we are now starting to see inflation overtake wages. Third-quarter US Average Weekly Earnings of Private Sector Workers (deflated) were 0.8% lower than the third quarter of 2020. This is where issues start to arise; now we are seeing the consumer start to fall behind. This trend factors into ITR's outlook for deceleration in the macroeconomy and consumer spending in 2022.
Combine the above considerations with the developing fade of the pent-up demand push and COVID-stimulus sugar high that have carried us to this point in 2021, and, from a growth rate perspective, the economy will come back down to earth next year. This trend bears watching, not only from a macroeconomic perspective but also for any business that has directly benefited from surging consumer spending over the last year or so. Make sure you are taking a measured approach to your 2022 budget and growth rate expectations, as the leading indicators that have been in your favor for the last several quarters are clearly signaling business cycle softening on the horizon.