Inflation and wages are a question of “chicken first or egg first”.

Are rising prices leading to rising wages, or are rising wages causing prices to rise? Probably both. When you look at the data, you'll see a clear relationship between the two.

The following is a comparison between year-on-year wage growth since 1965 and 12 consecutive months of inflation:

Figure: Wages exceed inflation (inflation rate vs. wage increase and the difference between the two. Light blue is the wage increase, dark blue is the inflation rate, the dotted line is the average level, and gray is the difference between the two: wage increases are lower than the inflation rate)

Wages are rising faster than prices most of the time, but this is not always the case. Since 1965, wage growth has been slightly below 60% of the time since the inflation rate.

Until now, the worst period for wages to lag behind prices was in the 1970s.

From 1973 to 1976, wage growth was lower than inflation for 36 consecutive months. Then, from the end of 1978 to the end of 1982, real wages showed negative growth for 50 consecutive months.

It's not just the length of time, but the magnitude of the difference. At its worst in 1980, inflation grew more than 7% faster than wages.

Surprisingly, wage growth was slower than inflation for a long time, from the mid-1980s to the mid-90s. From 1984 to the summer of 1995, prices rose faster than income for 88% of the time.

You haven't heard much about that time frame causing economic pain, but maybe that's because at least it's better than it was in the 1970s.

This time,Of the 23 months from 2021 to early January 2023, wage growth was lower than the inflation rate for 21 months. Currently, wage growth has exceeded inflation for 14 consecutive months.

The good news is that wages are growing faster than inflation. The bad news for many families is that no one lives exactly in line with the economic average.

Wage increases for those who changed jobs during the pandemic were far higher than those who stayed with their current employers:

Figure: Salary increase tracking (median salary increase, 3-month moving average, hourly data) (red line is for those who have not changed jobs, black line is for those who have changed jobs)

As always, some are doing better while others are falling behind.

The problem with this relationship is that people think wage increases are earned by them, while rising prices are a form of theft. This is one of the major reasons for the decline in economic popularity over the past few years.

People really despise high inflation, but you can't talk about the impact of inflation without talking about the other side of the ledger. Wages have also been rising, which is an important reason why the economy remains so resilient.

It's also worth noting that at the start of the pandemic, we saw a huge spike in wage growth, which is partly a myth. The only reason you see a sharp rise (and then decline) in the data is that too many people with lower incomes have been laid off (think of the service sector).