COVID 19 also did crazy things to prices and wages in April

The volatility of our current economy was greatly illustrated in two reports released today. It shows how consumers are seeing significant changes in prices they are paying for products (if they’re buying them at all). And it shows that those who have maintained their incomes in these crazy times are getting benefits from this situation, (but of course, you have to be someone who maintained your income) and it reiterates how most job losses are in the lower levels of the economy.

Let’s start with the Consumer Price Index report, which reminds us that our main economic problems today are deflation and unemployment….except for one major expense.

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.8 percent in April on a seasonally adjusted basis, the largest monthly decline since December 2008, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 0.3 percent before seasonal adjustment.

A 20.6-percent decline in the gasoline index was the largest contributor to the monthly decrease in the seasonally adjusted all items index, but the indexes for apparel, motor vehicle insurance, airline fares, and lodging away from home all fell sharply as well. In contrast, food indexes rose in April, with the index for food at home posting its largest monthly increase since February 1974. The energy index declined mostly due to the decrease in the gasoline index, though some energy component indexes rose.

The index for all items less food and energy fell 0.4 percent in April, the largest monthly decline in the history of the series, which dates to 1957. Along with the indexes mentioned above, the indexes for used cars and trucks and recreation also declined. The indexes for rent, owners’ equivalent rent, medical care, and household furnishings and operations all increased in April.

This is an illustration I made to give you an idea about these disparities.

The crash in gasoline was apparent in April, if you had to fill up your gas tank at any point in that month (it's possible you didn’t have to). But food prices were the huge exception, with meat prices especially spiking, even before we had all of the food plant outbreaks and supply disruptions that have led grocery stores to limit how much customers can take.

The report also indicates that many other industries and stores are not getting good prices for their products, which reflects the collapse in demand that came with so many Americans staying in and/or losing income.

You have some serious bifurcation on the effects of this. If you typically drove a lot before COVID-19 broke out or were planning to make a big purchase to get some kind of good that isn’t food, you’re likely better off with those prices dropping (again, this doesn’t apply if you lose your job and/or income). But if you had large bills from the grocery store already, and/or have gone to the grocery store more due to being stuck at home vs going out to eat, you may been getting hit by those higher food prices. And it doesn’t seem that those prices would be going down any time soon.

The overall deflation led to another extraordinary number that came out today – a spike in average real wages.

Real average hourly earnings for all employees increased 5.6 percent from March to April, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from an increase of 4.7 percent in average hourly earnings combined with a decrease of 0.8 percent in the Consumer Price Index for All Urban Consumers (CPI-U).

Real average weekly earnings increased 5.8 percent over the month due to the change in real average hourly earnings combined with a 0.3-percent increase in the average workweek.

As I mentioned with last week’s jobs report, the increases in average wages and hours worked isn't because of pay raises or part-timers becoming full-timers, but instead is a reflection of low-wage, part-time jobs in the service industry going away in April as Safer at Home restrictions came into play.

With average hourly wages up nearly 8% on a year-over-year basis, it nearly doubles the peaks we had in 2008 and 2009, which also were inflated due to the effects of the Great Recession.

The last time we saw such a large jump hourly wages over a 12-month time period was in 1981, which was on the back end of major inflation. 1981 year was also the last time we saw savings rates around 13% (as we had in March 2020), and that also was a time that the economy was falling into recession, but wages hadn’t dropped off as of yet.

What both these figures show is that we are in a classic “your mileage may vary” situation. If you’re out of work, things are really bad. But if you have a lot of expenses in commodities and you are still getting paid, then things might be very affordable to you right now.

However, these are weird times, and it seems likely that there will be snapback on the real wage front very soon, and we are already seeing oil and gas prices start to rise off of the bottom. If our food supply continues to suffer from shortages and shutdowns, then the deflation we saw in April may turn around into a Bubbly inflation in a time of double-digit unemployment. And that won't be good for anyone that isn't a hedge funder.