Weak Inflation Justifies the Fed Pause

Written by Richard Hokenson 

The consensus forecast for price inflation this year was for acceleration. Instead, core CPI inflation continues to decelerate (see Chart 1) with monthly increases trailing last year for both January and February (see Chart 2). The world is awash with disinflation whether it is the US, the Eurozone or Japan. This development is very much in line with our thesis that an ageing population crushes inflation. Due to the government shutdown, we (Hokenson & Company) don’t yet have confirmation of the weakness in core CPI being replicated in the core PCE deflator, which is the Fed’s preferred measure of inflation. Results for January and February won’t be released until the end of this month. But we would be very surprised if they tell a different story. We expect the “pause” to last quite a while.

There has also been some concern due to the uptick in February wage inflation as measured by Average hourly Earnings (AHE). The Employment Situation report for March which will be released on April 5 is highly likely to show an easing in wage inflation. Wage inflation appears to be back on track relative to its performance relative to the same month in the prior year, i.e. robust monthly gains in the prior year result in a smaller monthly gain in the current year and wage inflation (measured year on year) decelerates. January 2018 was a relatively strong month with AHE increasing by 7 cents per hour (see Chart 3).

The January 2019 gain was only 2 cents per hour – wage inflation eased from 3.3% to 3.1% (see Chart 4). The converse occurred in February. The February 2018 increase was only 4 cents per hour. The February 2019 gain of 11 cents per hour meant that wage inflation ticked up to 3.4%. The March 2018 increase was 9 cents per hour, making it highly likely that wage inflation for March 2019 will register a deceleration relative to February.

It is also very possible that better news on wage inflation will be accompanied by more robust news on payroll employment, allaying concerns that economic activity has ground to a halt. The preliminary estimate of payroll job growth of 20,000 for February is at variance with the much better numbers from the household survey. Specifically, the household survey shows an increase in the number of wage and salary workers employed in non-agricultural industries of 423,000. For most of the past, it has been truer that payroll gains exceed the results from the household survey. While such a divergence between the two surveys in the other direction is very unusual, however, it is not totally rare.



This update was researched and written by Richard Hokenson, as of 15 March 2019


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