Wages and Prices Redux

Written by Richard Hokenson 

True to form, wage inflation decelerated to 3.2% in March versus 3.4% in February (see Chart 1). The monthly increase was 4 cents per hour versus 9 cents per hour in March 2018 (see Chart 2), in line with our (Hokenson & Company) research which shows that ‘big” increases in the year-ago month are highly likely to result in a “small’ gain in the current month. Payroll employment increased by 196,000 confirming that the meager February gain was an anomaly.

Contrary to expectations, the core PCE deflator fell to 1.8% in January (see Chart 3). Nevertheless, there are many observers who remain of the opinion that higher wages will result in higher price inflation. To address this issue, our proxy for wage pressures on the core rate is the core rate less shelter, which is decelerating at an accelerating rate (see Chart 4). A complimentary analysis was recently done by the San Francisco Federal Reserve Bank. Citing that study, a recent article in The Economist concluded that “…underlying inflationary pressure did not subside in the second half of 2018, because it was never there in the first place."

The San Francisco Fed study divides the categories of core PCE inflation into cyclical and acyclical components. Cyclical components include those categories where prices tend to be more sensitive to overall economic conditions, e.g. demand driven. This is a broad definition which would include items where input costs, e.g. wages, play little if any role. Acyclical components include those categories that are more sensitive to industry-specific factors, e.g. health care. Cyclical inflation has eased even as the economy accelerated (see Chart 5). Continued moderation in rental costs for housing (including imputed rents) implies even further weakness in cyclical inflation.

Investment Implications:

The U.S. economy is still enjoying one of its longest expansions on record. Wage inflation remains moderate and price inflation is slowing which will keep the Fed on hold. The pace of economic activity may slow somewhat but it is a slowdown not a downturn.

Shapiro, Adam. “Cyclical and Acyclical Core PCE Inflation.” FRB San Francisco Economic Research: Indicators and Data.



This update was researched and written by Richard Hokenson, as of 5 April 2019


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