The Deflation Factor & Real Wages

Economist Bob Dieli of writes in to point out that the chart posted earlier today (reproduced below) that compares real (inflation-adjusted) wages with personal consumption expenditures was dramatically skewed in late-2008 and 2009 by the brief but potent round of deflation that hit the U.S. economy.

In particular, Dieli reminds that “the ‘improvement’ in real wages suggested by the line late in the recession was entirely the product of the deflator going negative.” He goes on to advise:

While it is true that this is an increase in the purchasing power of the wages during the period in which the aggregate price level was falling (and it fact it was just energy prices doing the deed) people have a tendency to think that a rise in that line reflects some rise in compensation.

In fact, quite a bit of it was simply the statistical blowback from the financial crisis. At one point in late-2008, deflation was roaring. The worst of it came during November of that year, when the consumer price index swooned by 1.8% in that month alone on a seasonally adjusted basis.
Deflation has since given way to mild inflation, and the annual pace in real wages has since returned to something approaching “normal” levels. But the question remains: Is the trend in real wages headed down? If so, there’s a case for expecting a decline in the pace of real consumer purchases, which may raise fresh concerns about the economic outlook. A dip in consumption per se isn’t necessarily a problem, assuming the trend isn’t persistent. But given the precarious state of economic concerns once again (as Alan Blinder, for instance, reminds today), one might wonder if Joe Sixpack’s recent fondness for spending (real retail sales are up more than 6% over the past year) has legs.