Wages vs Inflation – Is Your Income Keeping Up?
Back in early September, I got a question from a viewer who also happens to be a fellow YouTuber, @OurRetireEarlyJourney, pondering the differences between housing and vehicle prices compared to wages over the last 20 years.
I thought it was a good question and since I’m always interested in what viewers want to see, I decided to make a video about it.
In this post, we’ll look at data from the Bureau of Labor Statistics to see how wages have paced in recent years as compared to homes, cars, and a few other common items we purchase.
1) Housing & Cars
Since the original question I received was inquiring about changes in the pricing of houses and cars relative to wages, I’ll start there.
Again, all of this information comes from the Bureau of Labor Statistics. They have a relatively user friendly data finder in case you want to do a little digging of your own.
In this graph, I’ve included data for the costs of housing and cars as compared to overall inflation and increases in wages since 2001 (for some reason the BLS didn’t have some of this data before 2001).
For those of you who prefer hard numbers instead of a graph, you’ll have to settle for this table which displays the annualized data over that span.
If you’ve been trying to buy a home in the last 24 years or so and it feels like you’re having trouble keeping up with the housing market, I’m afraid it’s not your imagination.
Housing is not just outpacing wage growth, it’s been outpacing it by about 1.4% in that time. This may not seem like much, but when you annualize that number it means the cost of housing has increased 32.67% faster than wages.
Put another way, each dollar spent for housing in 2001 would only carry you 75% as far in 2024.
The silver lining here is that wages have just managed to outpace inflation in that period and, believe it or not, your money will go further when buying a car now than in 2001.
I don’t really have much of an explanation for this. Clearly, there was an automotive pricing bump during the pandemic, but I was a bit surprised to see the relative steadiness in the pricing of cars.
Another thing that stands out to me is the near linear path each of these categories seems to follow until the world came unglued in 2020.
Let’s take a closer look at the impact the last four or five years have had on this data and also see how prices have changed in a couple of other categories.
2) The Last Five Years
I’ll spare you a historical summary of the last five years. From just a financial standpoint, they were traumatic enough without getting into the geo-political issues that have been going on.
As you know, we have seen dramatic inflation that has served to reshape the way we approach the purchase of certain items.
Similar to the previous section about housing and cars, this chart shows changes in prices over time. In this case, we’re looking at data only going back to 2020.
I’ve also added groceries, college tuition, and prescription drugs to our review. Here is a table with the data annualized over this period.
I chose groceries because I still can’t believe how much I have to spend every time I go to the store.
Tuition and Prescription Drugs were added because prices in those two categories advanced rapidly in the late 2010s, or so I thought.
Data like this always drives me into a bit of a moral dilemma.
I know that the cost of tuition in my home state of Alabama has increased at a much faster clip than 1.6%.
In another post I wrote about 529 plans, I found data that indicated the cost of attendance in the United States has been increasing at the rate of 6.2% annually in this same timeframe.
So, is the BLS wrong?
In my opinion, the data I managed to pull was limited to certain schools, students, or degree programs.
I would just toss it out and go looking for data that better supports the point of view I presented in my 529 post, but that seems dishonest somehow.
I’m only bringing it up because I think you should draw your own conclusions.
Anyway, back to the data…
As expected, groceries have gotten expensive. And lucky me. I’ve got two kids barreling toward their teenage years. Their stomachs are not getting any smaller.
The other not-so-shocking data point is housing.
What I find most alarming about housing costs is the fact that the curve doesn’t look to be losing any steam like cars and groceries have.
Also, the gap between wage growth and housing appears to be getting larger with time. Thankfully, this isn’t the case with inflation and wages which are trending back into balance as high interest rates continue to slow the CPI.
While we’re talking about wage data, the fact that wages continue to grow is incredibly beneficial in helping our country recover from the choppiness of the last several years.
If inflation slowed, but wages failed to grow it would prolong some of the economic headaches we’ve been experiencing. Thankfully, there is plenty of work available for Americans right now.
3) So, Where To Go From Here?
For the most part, the inflation we’ve seen in recent years isn’t all that different from other periods of inflation we’ve experienced historically, with a couple of key differences.
First, wages have managed to keep pace for the most part and they continue to grow. I don’t think I can overstate how beneficial this is for the economy.
Productivity is the real force that drives the economy forward.
The other, and bigger, issue is housing.
Frankly, the diverging trend between wages and the cost of housing concerns me for a number of reasons.
For one, this data includes both rents and ownership of housing. In both cases, housing is getting more and more difficult to afford.
And unlike other common consumer categories like groceries and cars, there is much less flexibility in the cost of housing.
From a financial perspective, homeownership is an effective way to “lock down” a major life expense. This is especially useful in retirement when income is typically lower and less flexible.
The longer people have to rent or save in order to “catch up” to the market, the longer they’re having to wait to tie down one of the largest living expenses they’ll have in the entirety of their lives.
Also, for most Americans, home equity is a central part of their net worth. Inflation in housing costs will help those who already have a home but hurt those who don’t.
Alas, this trend will only serve to increase the gap between haves and have-nots which seems particularly undesirable in a country that prides itself on providing opportunities for basically anyone to improve their standard of living.
If you are among those striving to save so you can buy a home of your own, I’m afraid I don’t have a magic wand that can reverse the trend of growing home prices.
I am hopeful that higher interest rates will close the gap I talked about earlier, and even though they have helped, we still have a way to go before things are more normal.
I would encourage you to continue saving and maybe consider lowering your standards a bit if you can so you can at least begin the journey of homeownership while rising prices also appreciate the value of the house you have.
Wrap Up
This data has all been interesting, but I don’t necessarily think it should change your financial behavior very much.
If you’re following our next dollar roadmap and you have an asset allocation that matches your goals, then don’t panic. Stay the course.
Good financial plans are built with circumstances like these we’re facing today in mind.
The storm will pass. Hold fast and keep up the good work.
(BTW, if you’re at all curious, the picture at the top of this post is me finishing a marathon in Beirut, Lebanon in 2018. Thankfully, it was a more peaceful and stable time then.)
