Wages, Prices and Families

Written by Richard Hokenson 

Although the increase in the January CPI was larger than expected, the true core issue in the inflation debate are wages, i.e. the concern that higher wage inflation will translate into higher price inflation with the combination resulting in a more aggressive Federal Reserve. In that vein, there was a Bloomberg posting a few days ago to the effect that the last time higher wages translated into higher prices was the early 1980’s. Since then, there has not been any linkage.

Changes in the financial structure of families is a significant reason for wage inflation not becoming price inflation. Specifically, the number of families in which both the husband and wife worked, which grew rapidly in the 1980s and early 1990s has since become flat. It declined during the financial crisis and has only partially recovered (see Chart 1).

The number of families in which the husband worked and the wife did not work troughed in the early 1990s and has increased robustly since then (see Chart 2). This development is in line with the increase in the number of women not in the labor force (see Chart 3).

I label households in which both partners work as “households with more money than time”. They are less sensitive to higher prices for several reasons. For example, if your spouse likes a particular brand of breakfast cereal and in going to the store you discover that it now has a higher price, you are very reluctant to experiment with another brand because the cost of that experiment if it fails is high – you have to go back to the store. Further feeding brand name loyalty and pricing power is that the roles in households sometimes changed. Men are much more brand allegiant, i.e. less sensitive to higher prices.

The reason for the growth of households in which only one partner is working is that women, mostly millennial women, are voluntarily exiting the workforce, i.e. folding work around the family. Thus, these are mainly households which went from two paychecks to one. These are “households with more time than money.” If the preferred breakfast cereal raises its price, it is a no brainer to substitute another brand or the store brand. If it is not what your partner wants, it is not a big deal as you are back to the store in a few days.

The end result of these changes is rapid growth in the number of inflation fighters. It is why many companies complain that they have great difficulty in making higher prices stick. It is certainly possible to post higher prices, e.g. apparel in January. It is quite another to make them last. Although the bubble effect will likely result in a higher rate of price inflation in March, the following months should have more moderate gains.


This update was researched and written by Richard Hokenson, as of February 16 2018