Economic indicators, Featured, Inflation

Does the slowdown in inflation mean that consumers are better off?

by oecdstatistics
7 minute read

By Tom Arend (tom.arend@oecd.org), Jarmila Botev (jarmila.botev@oecd.org) and Anne-Sophie Fraisse (anne-sophie.fraisse@oecd.org), OECD Statistics and Data Directorate

Recent months brought positive news about declining inflation, with rates finally coming within reach of central banks’ targets and pre-pandemic inflation (Figure 1, Panel A). This is especially welcome after the surge in inflation rates following the Covid pandemic, supply chain disruptions and start of war in Ukraine, in 2021-22, when in many OECD countries inflation reached figures not seen since the 1980s. However, declining inflation rates do not mean declining prices, only a slowdown in their increase (see Box 1). Average prices of consumer goods and services are now (as of September 2024) about a third higher for an average OECD country than they were in December 2019 (Figure 1, Panel B).

Figure 1. CPI year-on-year inflation rates vs CPI index for G7 countries and the OECD

Source: OECD Consumer Price Indices database, authors’ calculations.

Moreover, growing prices of consumer goods and services have eroded the purchasing power of mean hourly wages of employees, as in several countries their growth rates did not keep up with average CPI inflation, or only started doing so relatively recently (Figure 2). These average developments of hourly wages relative to consumer prices also mask the underlying heterogeneity, as various types of households are affected to a varying extent by price increases of different types of goods and services due to different consumption patterns.

Box 1: How do we measure prices and are falling prices always good?
It does not make much sense to measure absolute aggregate price levels of consumer baskets, i.e. to mix monetary prices of various goods and services that can be as diverse as apples, oranges, cars or getting a haircut. We can, however, compare these diverse prices either over time (has the price of a haircut grown more than the price of an apple?), or across space (is food in France more or less expensive than food in the United States?). The former is usually measured via Consumer Price Indices (CPIs), the latter via Price Level Indices derived from Purchasing Power Parities. The inflation rate measures the change in CPIs over time (e.g. usually relative to its value a year ago), or how much the prices of the average consumer basket, weighted by share of individual items in total household expenditure, have changed over the period.

Central banks usually set price stability as one of their main objectives. This, however, does not mean zero inflation or even negative inflation, but rather a small positive one (e.g. the European Central Bank’s target is “2% inflation over the medium term”). This is because while the prices of individual goods and services can fall to the benefit of consumers, if all the prices in the economy continuously fell, this could hamper spending and investment and, consequently, economic growth and well-being.

Figure 2. Cumulative change in real wages of employees per hour worked

Per cent cumulative growth relative to 4th quarter of 2019

Note: Hourly wages are derived as Wages and salaries (a component of quarterly labour compensation of employees) divided by number of actual hours worked. Number of actual hours worked is sourced from Quarterly National Accounts and refers to total workers (employees and self-employed) and has been adjusted to refer to employees only based on number of employees relative to total employment (i.e. number of employees and self-employed) sourced from Annual National Accounts. The index is then deflated with CPI All items and seasonally adjusted. National sources were used when data was not available in OECD National Accounts databases. The OECD average is an hours-worked-of-employees-weighted average across the 30 OECD countries with available data. Due to data availability constraints for Japan and the United States Compensation of employees is used instead of Wages and salaries (i.e. employers’ social contributions are included); hours worked for employees for Japan are sourced from the Japanese Labour Force Survey (i.e. not National Accounts); hours worked for Australia are for total workers (i.e. not adjusted for employees only).

Source: OECD Quarterly and Annual National Accounts, OECD Consumer Price Indices database, Australian Bureau of Statistics, Statistics Bureau of Japan, U.S. Bureau of Labor Statistics, author’s calculations.

Food and non-alcoholic beverages is an important category in households’ budgets: in an average OECD country an average household spends around 17% on food, ranging from 8% in the United States to 28% in Poland[1]. However, low-income households tend to spend a much larger share of their expenditure on food, as well as, to a lesser extent, older-aged, lower-education and rural households[2] (e.g. Causa et al., 2022; Caisl et al., 2023). For these households, the erosion of purchasing power since before the pandemic is therefore likely to be much more dramatic than for an average household. In fact, average hourly wages growth could not keep up with the surge in food prices in about half of the OECD countries. Food is one of the expenditure categories with the highest cumulative price increases since December 2019 and a high variation across countries, ranging from around 75% in Hungary to 7% in Switzerland. Türkiye is an outlier with food prices currently being around 360% higher than in December 2019.

Figure 3. Food and non-alcoholic beverages: average price increases since December 2019

Per cent cumulative growth relative to December 2019

Note: OECD average is weighted by the countries’ Final Consumption Eexpenditure of Households and Non-profits institution serving Households expressed in purchasing power parities and it excludes Japan and Costa Rica due to data limitations. For information on how average hourly wages are derived, see note to Figure 3. Source: OECD Quarterly National Accounts and Annual National Accounts databases, OECD Consumer Price Indices database, authors’ calculations.

The Energy category is comprised of Electricity, gas and other fuels, i.e. energy used for housing, as well as of Fuels for personal transport. It shares many characteristics with Food and non-alcoholic beverages: it eats up a marked share of household budgets, with OECD average of 9%, ranging from 5% in Israel to 18% in Poland. Similarly to food, low-income, older-aged, lower-education and rural households tend to spend an even larger share of their income on energy, in particular on housing energy. Energy prices also surged since December 2019, their cumulative growth coming close to or even exceeding 50% in about one quarter of OECD countries (Figure 4), with energy price growth exceeding that of average hourly wages in about half of OECD countries. However, more than half of the economies have seen energy prices decline since mid-2023, dampening the overall growth somewhat. In September 2024, year-on-year energy prices were falling in 28 OECD countries.

Figure 4. Energy: average price increases since December 2019

Per cent cumulative growth relative to December 2019

Note: OECD average is weighted by the countries’ Final Consumption Expenditure of Households and Non-profits institution serving Households expressed in purchasing power parities and it excludes Japan and Costa Rica due to data limitations. For information on how average hourly wages are derived, see note to Figure 3. Source: OECD Quarterly National Accounts and Annual National Accounts databases, OECD Consumer Price Indices database, authors’ calculations.

Housing expenditure is comprised of actual rentals, imputed rentals for owner-occupied housing and maintenance and repairs of dwellings. It also accounts for a relatively large share of household expenditure, 19% on average in the 19 OECD countries with available data, ranging from around 9% in Australia to more than 30% in the United States. Prices in this category rose less dramatically than those for Food or Energy, but while the prices of the latter categories have decelerated or have even started falling since their inflation peaks, housing prices continue to rise even after mid-2023.

Figure 5. Housing: average price increases since December 2019

Per cent cumulative growth relative to December 2019

Note: A smaller set of countries is shown, due to data availability. For information on how average hourly wages are derived, see note to Figure 3. Source: OECD Quarterly National Accounts and Annual National Accounts databases, OECD Consumer Price Indices database, authors’ calculations.

While falling inflation rates are generally good news, the price levels relative to pre-Covid period remain elevated. Consumers can feel this especially for some expenditure categories or in countries where average hourly wages have yet to catch up to heightened price levels. Even in countries where the average purchasing power seems to have held up well, some households may feel a much higher burden on their budgets than others.

More information on consumer prices and wages

References

[1] Expenditure weights are based on 2023 data or latest available and correspond to the relative share of total household expenditure which is spent on an item covered in the CPI during the weight reference period, used to derive the respective subcomponent of Consumer Price Index, from the OECD Consumer Price Indices database.

[2] These findings hold even when accounting for changing overall consumption patterns during and after the pandemic, at least for EU countries. (see Box 4.2 in Caisl et al., 2023).