Please ensure Javascript is enabled for purposes of website accessibility

Wages Are Finally Rising -- Here's What You Should Watch

By Motley Fool Staff – Nov 8, 2018 at 8:50AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's how to put the impressive wage growth figures in the right context.

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.

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.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
327%
 
S&P 500 Returns
105%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.