Inflation is visible, but wage gains seem invisible – The Big Picture

I have been observing how radically unusual various sentiment readings have been for several years now. It didn’t make sense to me that the post-pandemic era saw sentiment levels well below major dislocations like the crash of ’87, the 9/11 terrorist attacks, the Dotcom boom, or the great financial crisis of 08-09.

We have tried to identify causal factors by considering social media, increasing partisanship, ignorance, and even trolling of pollsters. These explain some of the strange trends, but not enough to fully rationalize the disconnect between data and sentiment.

Today I want to step back and consider a neglected psychological factor. I discussed this last week with Ben and Duncan Ask the Componentbut I wanted to further reflect my point:

Inflation is visible and everywhere. We all know what we pay for items in supermarkets; how much does it cost to go out to a nice dinner for two. Perhaps the most obvious is when we fill up our cars with gas. Prices per gallon are displayed in six-foot-tall letters perched atop 30-foot-tall poles.

We see the costs of home prices (at least by looking up prices on Zillow).¹

Your salary earnings, on the other hand, are almost invisible. Most of us get paid by direct deposit into our bank account. These are not posted online, or on giant signs in our yard. Someone earning $100,000 a year receives a bi-monthly salary of $2,328.82. If they get a 7% raise, they see a modest increase in their direct deposit after FICA, federal and state taxes, 401k, etc. After this 7% bump, their compound is up $163 to around $2491.84.

It’s not that it’s not important, it’s just not in your face every day. It is mostly invisible. Maybe you have a little extra money left at the end of the month; maybe you’re paying off your debt a little faster. But earlier in my career, whenever I got a significant raise, it was hardly felt.²

Now consider gas prices, a widespread complaint. It’s about $3.50. This has been essentially flat over the last 10-20 years. APARTMENT. It’s been a bit higher and a bit lower over that period, but gasoline prices have been capped for 2 decades.

Cars are much more efficient – we refresh the hybrid every other month! – and energy as a percentage of your household budget is lower than ever. This is despite a hot war raging in the Middle East (a very large source of oil) and an ongoing war that began with the invasion of Ukraine by Russia (another giant oil producer).

That you can book in 2024 for $50-$75 is an economic miracle, but people still want to complain about gas prices.

Houses are another legitimate and huge complaint. We’ve discussed in the past how this is largely a supply issue. (And that’s before we even get to the Lock-In effect). As of January 1, 2024, about 70% of all mortgage holders had rates three full percentage points below market rates. In other words, 88.5% have a mortgage rate below 6%. I don’t want to minimize the very real stress that young families feel unable to buy a starter home. But for the rest of us, it seems like we’re all glass-half-empty mortgage holders.

This all reminds me of an old Steven Wright quote: “Last night someone broke into my apartment and replaced everything with exact copies… When I showed it to my roommate, he said: “So I know you?“

Prices have risen dramatically following the biggest fiscal stimulus as a percentage of GDP since World War II. But so are salaries. For most of us who aren’t regularly typing numbers into spreadsheets, it might not feel that way.

Some changes are obvious and disturbing. Others are positive but invisible. I don’t know if that explains all of the discrepancy between current economic conditions and sentiment, but it probably explains some…

Before:
What is the customer doing…? (May 20, 2024)

Wages and inflation since COVID-19 (April 29, 2024)

What else could sense of direction be? (October 19, 2023)

Is partisanship fueling consumer sentiment? (August 9, 2022)

The Problem with Consumer Sentiments (July 8, 2022)

Feeling LOL (May 17, 2022)

How Everyone Miscalculated Housing Demand (July 29, 2021)

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1. The first thing I do when I look at any home listed for sale is click more info and see how long the home has been listed. Any homeowner who is unable to sell a home within a few weeks or a month in what has been the hottest market of our lifetime has priced the home wrong.

When you do a Zillow search, sort the results by newest first, then scroll down to the bottom of the list to see homes that have been unsold for 200, 300, 400 days. These houses are not really for sale.

2. I remember well the first year my wife and I’s combined salaries were over 6 figures; it meant we no longer looked closely at the prices in the supermarket and could buy more fresh fruit and brand name pasta sauces…