EC Wage Inflation Isn't Coming, It's Already Here

George Soros has a great line that we’ve used a lot in Epsilon Theory notes. When he was asked how he could possibly have predicted what would happen when he famously “broke the Bank of England” in 1992, he replied: "I’m not predicting. I’m observing."

It’s the perfect catchphrase for the modern, narrative-savvy investor. It’s the perfect catchphrase for the Three-Body Problem market, where there is no algorithm for predicting markets (no closed-form solution, in the lingo), but only tools for calculating markets. Where there is no answer for successful investing. But there is a process.

I'm not predicting. I'm observing, and here’s what I am seeing: over the past four quarters, the United States has generated more wage inflation than at any point over the past 40 years. Seeing is believing, so here’s the chart of average weekly earnings (weekly earnings, not hourly) for Americans in private sector jobs from 1963 through today, measured quarterly.

Bloomberg: US Average Weekly Earnings SA, Quarterly Jan 1, 1963 – Mar 31, 2021

And here’s the same data on a monthly basis over the past 14 years:

Bloomberg: US Average Weekly Earnings SA, Monthly Jan, 2007 – April, 2021

These are the facts. These are not predictions. This is what has already occurred.

  • Q1 2021 wages were 7.7% higher than Q1 2020 wages.
  • Q4 2020 wages were 7.7% higher than Q4 2019 wages.
  • Q3 2020 wages were 6.2% higher than Q3 2019 wages.
  • Q2 2020 wages were 6.5% higher than Q2 2019 wages.

These are also facts:

  • Over the past 10 years prior to the past 4 quarters, the highest single quarterly year-over-year wage growth was 3.6% in Q4 2018.
  • Over the past 20 years prior to the past 4 quarters, the highest single quarterly year-over-year wage growth was 4.5% in Q4 2006.
  • Over the past 30 years prior to the past 4 quarters, the highest quarterly year-over-year wage growth was 4.8% in Q4 1997.

You have to go back 40 years – to Q3 1981 – to find a higher quarterly year-over-year wage growth number (+8.5%). This is not an anomaly. This is not a single quarter aberration. This is not transitory. This is four straight quarters of the highest wage growth numbers in 40 years. For those keeping score at home, the US inflation rate in 1981 was 10.3%.

Now I know what you’re thinking. You don’t believe me. Surely, you say, if this were true, we would have heard some mention of this not-in-forty-years wage growth phenomenon. I think I know why you’ve heard nothing about this. The reason no one recognizes that remarkable wage inflation has already occurred is largely because of the intentional 'cartoonification' of unemployment and wage data.

I’m using the word ‘cartoon’ in its technical sense here, as an abstraction of an abstraction. I’ve written about these cartoons of macroeconomic data in service to political ends quite a bit (in fact, earlier this week we published a note on the cartoon that is CPI). And here’s an extended money quote from an older note:

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Disclosure: This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal ...

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