Wages And Prices: A Welcome Breakup

Bigger paychecks plus lower prices add up to more buying power for consumers. (iStockphoto)
Bigger paychecks plus lower prices add up to more buying power for consumers. (iStockphoto)

A new government report confirms: Wages and prices are going their separate ways.

This breakup is helping consumers on the rebound from recession.

Fresh evidence of the split came Monday in the Commerce Department's monthly report on personal spending, income and saving. It showed paychecks are fatter, prices are leaner and Americans are saving more.

"Personal income gains were up 0.3 percent for the second month in a row," Chris Christopher, an economist with IHS Global Insight, said in a written analysis. "Wage and salary disbursements were very robust in January."

In other words, lots of people got decent raises in the new year.

Meanwhile, prices fell by 0.5 percent. That was driven by plunging energy prices (down 10.4 percent) and falling food prices (down 0.2 percent).

Typically, wages and prices move together. That's why economists so often refer to a wage-price spiral. And that's what the Federal Reserve worries about — a pattern of workers getting raises but losing buying power as companies hike prices to keep pace with labor costs. But it's different now because those much lower oil and commodity prices are allowing businesses to hold down prices.

So here's the new equation: Bigger paychecks plus lower prices add up to more buying power.

"Real disposable income increased a whopping 0.9 percent in January, after increasing a robust 0.5 percent in November and then again in December," Christopher said.

So did everyone go shopping in January? No.

We were saving money because we were stuck inside of our igloos, aka homes. The personal saving rate rose a half-percentage point to 5.5 percent. "Weather effects probably kept many shoppers away from the mall and automobile dealerships," Christopher said. "But March looks like it will bounce back nicely, weather permitting of course."

The Commerce report was not a shocker; in fact, it just confirms what other data have been showing. For example, last week, the Labor Department's consumer price index indicated that retail prices were down, and the latest producer price index also showed a drop in wholesale prices.

In a story last month on the CPI, software engineer Daniel Davis told NPR:

" 'Wages are rising for us,' he said, referring to tech workers. At the same time, 'I've noticed the gas [prices] going down.'

"Davis' bottom line: 'The level of comfort for buying personal things has gone up.' He said his recent splurge of choice was an expensive sports watch."

Given that consumer spending drives more than two-thirds of the economy, all of this bodes well for springtime. If Americans are gaining in buying power and savings, they should be in much better shape in the second quarter to go house hunting or vacation planning or just plain old shopping.

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