Moderate Wage Increases and Softer Price Inflation

Written by Richard Hokenson 

The Employment Cost Index (ECI) increased by 2.9% in the 12 months ended September, a very modest uptick from the 2.8% recorded in the 12 months ending in June. The fact that wage inflation remains moderate even though the unemployment rate is at a nearly 50-year low confirms our view that the “full employment” unemployment rate has yet to be breached (see Chart 1).

Continued moderation in wage gains is not the only issue that confounds the consensus. Price inflation is decelerating despite very robust economic growth. The core CPI has eased from the recent peak of 2.35% in July to 2.17% in September (see Chart 2). Moreover, the year to date average monthly increase of 0.18% is below the 0.19% monthly increase that occurred in 2016 (see Chart 3).

The slowdown in core PCE inflation is less dramatic (see Chart 4) with the year to date average monthly increase of 0.16% matching 2016 (see Chart 5).

Because there has been a dearth of commentary regarding the possible impact of the October 2017 decline in Average Hourly Earnings (AHE), we repeat our concerns that this Friday’s employment report could show a significant uptick in wage inflation as measured by AHE. That would be a pity because it might spoil the picture of moderate wage inflation and soft price inflation that should allow the Fed to be less aggressive.



This update was researched and written by Richard Hokenson, as of November 1 2018