Tame Wage Pressure Suggests Inflation Pickup Only Temporary

Data in February showed core PCE inflation is up 1.7%, which would be just below the Fed’s target of 2%.  However, Deutsche Bank economist Joseph Lavorgna believes that the recent pickup in core inflation is temporary because it has not occurred alongside any noticeable increase in wage pressures.

He highlights that average hourly earnings, the employment cost index and worker compensation have all been trending sideways.

Other survey-based price measures tell a similar story.  The National Federation of Independent Business (NFIB) Survey data indicate very little in the way of any wage or price pressures.

Lavorgna said they care about the NFIB small business survey because it can provide us with an early read on the direction of the economy and the trends in both wages and prices.

“At present, the economy remains weak, and there is little evidence to support higher wage growth and inflation. The headline index of small business optimism was 92.9 last month, which was a 24-month low. In addition, the percentage of firms expecting the economy to improve remained at its lowest reading since November 2013. This was corroborated by declines in the percentage of firms expecting higher sales as well as the percentage of firms planning capital expenditures in the near term: Each series remains well below its cyclical peak. None of these data suggest the economy’s growth rate is on the cusp of turning meaningfully higher. Moreover, there is no evidence of any wage or price pressures within the NFIB.”

The economist notes that the percentage of firms planning to raise worker compensation has retraced last year’s increase:

“After rising steadily starting last September to a post-recession high of 21% last December, the series has plunged nine points in the first two months of this year to just 12%. This is where it was last August and is right in line with its trailing four-year average. This is important because small businesses (1-49 employees) account for 42% of total employment according to the ADP survey.”

He said price inflation suggests a similar story:

“There are two NFIB price series: One measures the percentage of firms raising average selling prices, and the other measures the percentage of firms planning to raise prices. Both series fell last month—the former remained at its lowest reading since October 2010 while the latter fell two points to 14%, which is where it was last September.”

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