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Hourly Wage Growth and the Economy

Real hourly wage growth may fall in the coming months and years as inflation returns to a more normal level.

Roland Czerniawski: In this week's chart, we analyze hourly wage growth and some of its implications to the broader economy. The chart depicts nominal hourly wage growth and the inflation rate, represented here by the Consumer Price Index since 2010.

Real hourly wage growth is the widely followed headline number, but here we are breaking it down into its two underlying components. What really stands out is that nominal hourly wages, the green line, have been growing at a steady 2% rate for many years now, and the growth rate has recently accelerated just slightly to about 2.2%. What made a huge difference in the real hourly wage growth, however, was the collapse of the inflation rate, the gray line, that began in late 2014, driven by lower oil and gasoline prices.

Consumers responded to this new environment somewhat rationally. In the absence of largely improved nominal pay, they refused to spend all the extra cash related to lower inflation, expecting the temporary gasoline break to eventually end. This resulted in a significant increase in the personal savings rate. More importantly, it appears that when inflation returns to its long-term 2% target, the real hourly wage growth could come down significantly, and those extra savings should be able to cushion overall consumption from collapsing.

Overall, nominal wage growth has been trending at a 2% level for a few years now. During those years, the U.S. economy has grown at a modest 2.0% to 2.5% rate, failing to reach the so-called escape velocity. We expect this trend to continue in 2015.