There is also another measure of inflation, the Personal Consumption Expenditures Price Index, which some analysts believe is the preferred inflation indicator for the Fed. For the record, the core rate for the CPI was 5.9 percent year over year, and the PCE Price Index for July will not be released until Aug. 26.
I usually focus on the headline CPI number. I consider the food and energy components to be the most visible to consumers, and therefore they are the most important to the surveys that gauge consumers' inflation expectations. Most of the time these surveys are not relevant to the economic outlook, but it is my opinion that inflation expectations from both the consumer and business sectors have been a factor in spending and investment patterns this summer.
It is important that the headline number starts to show some improvement because that will help to assuage some of the anxiety that consumers are feeling when they go to the grocery store. But it will not eliminate the anxiety completely. That's because wage growth is still not keeping pace with the large price increases of the past year.
To illustrate this situation, I have updated my chart that compares changes in CPI to changes in wages.
Numbers That Matter is a monthly column. Find others by Bill Wood here.
We may not have fully appreciated it at the time, but the trends in this data were pretty reliable before the pandemic hit. Inflation was stable right at the 2 percent level, and wages were growing at a moderately faster pace. In theory, this type of growth does not disrupt the relationship between wages and inflation because the gradual rise in the economy's productivity levels keeps a ceiling on prices and a floor under wages.
Obviously, the pandemic disrupted the beautiful state of equilibrium, and this resulted in a self-reinforcing upward spiral in both wages and inflation. Wages increased in July, and they are currently rising at a pace that exceeds 5 percent per year. But when you adjust this for inflation, it means that wages actually declined by 3 percent in the past year.
The impact of all of these trends on the plastics industry has been mixed, but I expect this situation will continue to be fluid. Manufacturers are certainly feeling the pressure to raise payrolls. And since resin prices are closely tied to energy prices, plastics processors have had to endure a sharp rise in the price of materials.
So far, a sizable segment of the industry has been able to maintain their margins by passing these increased costs on to consumers. The supply disruptions caused by the pandemic resulted in a large amount of pent-up demand for many types of products such as building materials, and this demand was amplified by the excess funds created by the government stimulus checks. Higher prices, aka inflation, were inevitable. But they are not sustainable, and neither are the current profit levels.