One of the consequences of the energy shock is a slower pace of growth in real wages that is about to affect the balance sheets of American households.
We expect a 0.4% increase in monthly average hourly earnings, which should translate to a 3.7% annual increase, when the March jobs report is released on Friday.
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But the jump in top-line inflation will hurt real wage growth, spending and savings in U.S. households through midyear at the very least even if the war in Iran is brought to a swift conclusion.
Hourly wage growth for nonsupervisory workers has been decelerating since the pandemic-era labor market shortage, dropping below its late-cycle 4% yearly rate to a 3.7% nominal growth rate in February.
Subtracting the overall inflation rate of 2.4%, that deceleration implies a real (inflation-adjusted) hourly wage growth of only 1.3% in the first months of the year.
It is quite possible that given the oil shock that is cascading through the U.S. economy, American households could experience a decline in real wage growth in the near term.
Given that real wages have more or less flatlined and food prices continue to increase, the result is a weekly shock at the grocery store.
But it’s not only the 3.0% yearly increase in food prices that is behind the affordability crisis.
The prices of most other household essential goods are creeping higher, with gasoline about to join the list when the March consumer price index is released on April 10.
Fuels and utilities are up 5.6% and likely to jump because of the energy shock. Rents are already 2.9% higher than last year. Clothes cost 2.6% more. Transportation costs are 1.8% higher and medical care is 3.3% higher, with many of these increases attributable in part to the tariffs.
The takeaway
Inflation-adjusted hourly wages have not kept up with the increased cost of essential household items, forming the basis for the affordability crisis.
This squeeze on households was the case in February before the attacks on the Middle East energy infrastructure and the cutoff of the global supply of oil, natural gas and fertilizer.
One should anticipate at best slower growth in real wages and, quite possibly, depending on the magnitude and persistence of the oil shock, a decline in coming months.
No matter the timing, the outcome of the war will most likely be higher prices and slowing real wages for a non-trivial period.
