A Technical Detail On Calculating Real Wages

In an earlier post today, I published a chart that compares real (inflation-adjusted) personal consumption expenditures with real average hourly earnings for production and nonsupervisory workers. The goal, as explained in detail in Joseph Ellis’ book Ahead of the Curve, is getting a handle on future consumer spending, which in turn is a useful measure for estimating the turning points in the economic cycle. In order to calculate real hourly earnings, however, we must deflate the nominal earnings data reported by the U.S. Bureau of Labor Statistics. In the chart in the earlier post, I deflated using the consumer price index (seasonally unadjusted). Ellis recommends using the personal consumption expenditures deflator (via the Bureau of Economic Analysis), and this preference is used in the chart below.

The magnitude of the inflation-adjusted results differ with CPI vs. the PCE deflator, but the basic message about the trend is the same. In any case, judge for yourself. Here’s the updated chart with PCE deflator. For comparison, take a look at the same data using CPI-adjusted hourly wages here.

Using the PCE deflator raises the real hourly wages level into positive territory on a rolling 12-month basis. By comparison, using unadjusted CPI data shows real hourly wage data in a general retreat on an annual pace, most of the time. But for purposes of using the trend to provide clues about turning points in consumer spending, both methodologies offer similar messages.