The blue line in the FRED graph above shows the real hourly wage in the United Kingdom from the middle of the 13th century onward. It is constructed from weekly earnings data divided by weekly hours worked to obtain hourly wages. Hourly wages are then divided by the consumer price index to adjust for inflation.

This line tells the story of how economic growth emerged in the United Kingdom and, by extension, in Europe. From the middle of the 13th century until the middle of the 19th century, there was no growth in real wages. Then, modern growth started and real wages increased exponentially.

The red line (right axis) shows the population of the United Kingdom, and the green line shows the population of England. (Note the drop in population in 1350 due to the Black Death). The data for the red line start only in the 18th century. Given its similarity with the data for England, though, it is reasonable to assume that the pattern of population growth for the United Kingdom prior to the 18th century is similar to that of England.

The story of population growth is similar to that of economic growth: There was very little increase in population size until the onset of the 18th century. Then the population accelerated noticeably.

There is one important difference between population and economic growth, however: their timing. It is clear from the figure that the acceleration in population predates economic growth. Demographers have debated for a long time the causes of the modern rise in population, and economists have debated the causes of modern growth. How are the two linked, if at all? One theory is that as countries get richer the abundance of food and medical care permits longer life expectancy and therefore larger population. Such a (Malthusian) theory, intuitive as it maybe, cannot explain the timing discrepancy on this figure. An older FRED Blog post addresses a similar puzzle.

How this graph was created: Search for and select “Average Weekly Earnings Per Person in the United Kingdom.” From the “Edit Graph” panel, add “Consumer Price Index in the United Kingdom” and “Average Weekly Hours Worked in the United Kingdom.” In the formula box, enter (a/b)/c. From the “Add Line” tab, search for and select “Population in the United Kingdom.” Repeat with “Population in England.” In the “Format” tab, assign lines 2 and 3 to the right axis.

Suggested by Guillaume Vandenbroucke.

The FRED Blog has discussed inflation expectations by showing different types of data in FRED. For example, Thomson Reuters and the University of Michigan conduct the monthly Surveys of Consumers, asking people to select the inflation rate they expect to see a year from today. Also, the Federal Reserve Bank of St. Louis calculates the daily breakeven inflation rate, which is computed as the difference in returns of types of constant-maturity Treasury bills: one being the traditional bill and the other being the inflation-indexed bill.

The FRED graph above shows another measure of inflation expectations that combines data from constant-maturity Treasury bills, survey forecasts of inflation, and inflation swap rates. These expected annual inflation rates for the next 30 years are produced by the Federal Reserve Bank of Cleveland.

At the time of this writing, in December 2021, the expected inflation rate for the next year is 2.46% and the expected rates over the next two and three years are 1.96% and 1.80%, respectively. Note that when you hover over the graph the date next to each expected inflation rate is the month and year when the expectation is calculated. Between the months of January and November 2021, those expectations changed in value rather noticeably. However, as the time horizon extends farther and farther into the future, the expected inflation rates become markedly less volatile and very similar in value. That is, the green 3-year line shows less variation than the red 2-year line, which shows less variation than the blue 1-year line. This suggests that financial market indicators, survey responses, or both point to medium- and long-term price stability.

How this graph was created: Search for and select “1-Year Expected Inflation.” From the “Edit Graph” panel, use the “Add Line” tab to search for and select “2-Year Expected Inflation.” Repeat the last step to add “3-Year Expected Inflation” to the graph.

Suggested by Diego Mendez-Carbajo.

A U.S. Treasury security typically promises to repay an investor a flow of coupon payments and then principal repayment once the security matures. These payments are made in U.S. dollars. A security that promises to deliver future dollars is called a nominal security. Most U.S. Treasury securities are nominal securities.

Nominal securities do not offer investors protection against unexpected inflation. The purchasing power of future dollars declines as the cost of living increases. In short, the same dollars buy fewer goods. To help protect investors against inflation risk, the U.S. Treasury also issues “real’’ securities—that is, securities that are indexed to the rate of inflation (or cost of living) as measured by changes in the consumer price index (CPI). These Treasury inflation-protected securities (TIPS) promise to deliver more dollars when the CPI is higher and fewer dollars when the CPI is lower.

These two types of securities can be used to infer bond market expectations of future inflation. The basic idea is simple: Consider a security that matures in, say, 5 years. FRED shows us that the annual yield on a 5-year TIPS is presently –1.65%. We can interpret this number as the real (inflation-adjusted) yield on a 5-year TIPS. FRED also shows us that the annual yield on a 5-year nominal Treasury security is 1.35%. If investors are indifferent between holding the two securities in their wealth portfolios, then they must be yielding something close to the same inflation-adjusted rate of return. This would be true if investors were expecting an average inflation rate over the next 5 years equal to 1.35% – (–1.65%) = 3%. To put things another way, for an investor to break even on a bet between a nominal and inflation-protected security, the expected rate of inflation would have to be 3%. For this reason, this market-based measure of inflation is called the breakeven inflation rate.

The FRED graph above shows that the 5-year breakeven inflation rate averaged close to 2% in the years leading up to the COVID-19 crisis. After an initial decline in early 2020, expected inflation over the next 5 years has risen steadily to about 3%. The reason behind this increase is hotly debated. The breakevens do not tell us the cause of inflation. They provide us only with a measure of inflation expectations.

How this graph was made: Search for and select “Market Yield on U.S. Treasury Securities at 5-Year Constant Maturity, Inflation-Indexed.” From the “Edit Graph” panel, use the “Add Line” tab to search for and add the remaining two series.

Suggested by David Andolfatto and Joel Steinberg.