A Preview of August Wage Inflation

Written by Richard Hokenson 

This coming Friday, there will be considerable attention focused on Average Hourly Earnings (AHE) in the U.S. when the Employment Situation report for August is released. Relative to the 2.53 per cent change from the year-ago month already published for July, there is a high probability that the August year-ago percent increase will be higher. Just as June 2017 showed some acceleration to 2.54 per cent from 2.46 per cent in May based on a “larger” monthly gain of 5 cents per hour this year compared to a “small” monthly gain of 3 cents per hour in June 2016, the monthly increase in August 2016 is only 3 cents per hour (see Chart 1). July, on the other hand, showed almost no change relative to June because both months had identical monthly gains of 9 cents per hour.
Because markets trade with no memory, i.e. almost no one looks at what occurred a year ago, most are unaware that the size of the monthly change in the same month in the prior year affects the volatility in wage inflation that the markets focus on (see Chart 2).

Table 1 displays a range of possible outcomes for AHE in August 2017. A monthly increase of 3 cents per hour (same as August 2016) keeps the year-ago percent gain unchanged from July at 2.53 per cent. A monthly gain of 11 or 12 cents per hour results in a year-ago percent change that rivals that recorded in December of last year (2.85 per cent) or February of this year (2.84 per cent). Although both months were hailed as confirming the long-awaited surge in wage inflation, they were both head fakes. Of course, an uptick of that size in August will be celebrated by the inflation cult as the sign that wage inflation is accelerating. That celebration, however, is unlikely to last very long as both September and October had relatively “large” monthly increases in 2016, making it more likely that wage inflation will subside. The actual reality remains the fact that wage inflation remains subdued, a development confirmed by the Employment Cost Index (see Chart 3).



This update was researched and written by Richard Hokenson. Data is as of 29 August 2017


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