Recent economic data indicates that wages are rising at the fastest rate in a decade. While this is certainly great news, the headline wage growth number doesn't tell the whole story.
In this Industry Focus: Financials clip, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discusses how investors should consider numbers like this in the proper context.
A full transcript follows the video.
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This video was recorded on Nov. 5, 2018.
Jason Moser: We also saw some news here that wages and salaries this recent quarter jumped by 3.1%. The reason why this seemed noteworthy to me is, it's the highest level in a decade. We talked a lot about, over the past several years, as unemployment has started recovering, that wages always seemed to be a little bit of a point of weakness there. While jobs were coming back around, wages weren't necessarily moving as much as some would want to see. It appears, though, now, that we have seen at least some kind of a jump there. What's your take on that? Is that something that's sustainable? Is that something that's going to play out in a good way on the economy? Or what?
Matt Frankel: It's definitely sustainable. From an economic standpoint, you want to pay attention to what's called real wage growth. That is, are wages growing at least as fast as inflation? To put it in context, if your salary goes up by 2%, but it costs you 2% more to pay for your mortgage, pay for your rent, pay for your groceries, etc., you really aren't making any more money. But on the other hand, if wages are going up 3.1%, like we just learned, and inflation is rising at about 2%, then your purchasing power is rising over time. That's what we really want to see. That means everybody's collective standard of living is going up over time.
So, yes, wage growth is excellent. Highest number in 10 years. But pay attention to inflation, especially as we go on this rate tightening cycle and the Fed's monitoring the economy like they are right now to see what the next move is.
Moser: Yeah. That inflation lesson is a really good one. We've talked about it in some of our Fool School classes, we'll meet with Girl Scout troops or classes, kids around 10-12 years old, give them some ideas as to how inflation works. We talk about it from the perspective of having your money in a piggy bank vs. having it in a bank account vs. having it in an investment account. You can see over time, obviously, your money's going to be very safe sitting there in the piggy bank, but over long periods of time, that inflation takes hold and actually erodes the value of that money in the piggy bank. The piggy bank is safe, but it's actually hurting you, because you're not keeping up with inflation. That was the lesson that got a lot of their attention. Once you can start understanding how that works and how it works over long periods of time, I think it really helps justify the case for not only investing, but investing the way we do here, taking that longer time approach.
