Waging War on Inflation
- Keywords:
- inflation
The U.S. inflation news has taken a welcome turn for the better. Oil prices have been the biggest wildcard for the outlook and they’re moving in the right direction: down. Regular gasoline now costs the same as at the start of the year and a third less than the record high ($5.02 a gallon) set this summer. In addition, the bursting of the housing bubble has taken pressure off rents, which will slowly dampen the two shelter components that comprise almost a third of the CPI. But food costs remain a concern and are at the mercy of the weather and war, with wholesale food prices up a sizzling 15.5% y/y in November.
After oil, perhaps the best news is that an inflation mainstay, wage growth, appears to be cresting. Big downward revisions have cast hourly compensation in a less intense light, rising a moderate 3.2% annualized in Q3 and cutting the yearly rate to a less alarming 4.0%. Alongside a belated upturn in productivity, unit labor costs rose a pedestrian 2.4% annualized in Q3, after averaging 7.6% in H1. Unfortunately, compensation looks to pick up in Q4 given firm average hourly earnings, which were up 5.1% y/y in November.
The above wage measures don’t control for compositional effects; for this, we need to turn to two other metrics. The venerable employment cost index popped 5.1% annualized in Q3 (and 5.0% y/y), juiced by the biggest increase in the public sector since 1989. By contrast, employment costs in the private sector simmered down to a 4.3% rate, the lowest in five quarters, though still up 5.2% in the past year. Meantime, the Atlanta Fed’s Wage Growth Tracker for November continued to track north of 6% y/y, though it’s off record highs in the summer. The Indeed Wage Tracker, which is based on job postings and captures trends for new hires, is also still growing strongly at 6.5% y/y, but it has decelerated sharply from a peak of 9% in March.
Like inflation itself, wage growth has topped out and might be climbing down the mountain, though the slope of the descent remains uncertain. We know from history that a tight job market will fan wages until worker shortages abate. On this front, the prognosis is concerning. While the downshift in labor demand helps, the supply side isn’t cooperating. Due to retirements and health fears, the participation rate is still more than a percentage point below pre-pandemic levels, denoting a loss of over three million potential workers. Consequently, the labor force has shrunk by 102,000 —despite a 5 million increase in the adult population. In the same 33-month period before the pandemic, the workforce expanded by 4.5 million. The number of adults not in the labor force has climbed by 5.2 million since February 2020 and continues to rise, after increasing just 346,000 in the same period before the pandemic. Data on labor force status flows suggest that more job leavers are dropping out of the workforce rather than looking for another job. And don’t count on an influx of recent retirees. A Fed paper (“The Great Retirement Boom”: The Pandemic-Era Surge in Retirements and Implications for Future Labor Force Participation) estimates that an additional 2 million people retired likely in response to the pandemic, and expects relatively few to return to the workforce as many were already 65 and older when leaving.
The net result is that since the start of the pandemic the supply of workers (the labor force) has contracted while the demand for workers (employment plus job vacancies) has soared—by either 4.2 million according to the payroll survey or 2.8 million based on the household report. Sawing off the difference suggests an excess demand for workers of around 3½ million or about 2% of the workforce. It’s this shortage that will likely keep the wage flame burning bright until the jobless rate rises meaningfully, likely by more than a percentage point.
The upshot is that, while cresting wage growth lowers the chance of a wage-price spiral, future declines could be stubbornly slow, limiting progress toward price stability.
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Sal Guatieri
Senior Economist and Director
Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with two decades experience as a macro economist. With BMO Financial Group since 1994, his m…(..)
View Full Profile >The U.S. inflation news has taken a welcome turn for the better. Oil prices have been the biggest wildcard for the outlook and they’re moving in the right direction: down. Regular gasoline now costs the same as at the start of the year and a third less than the record high ($5.02 a gallon) set this summer. In addition, the bursting of the housing bubble has taken pressure off rents, which will slowly dampen the two shelter components that comprise almost a third of the CPI. But food costs remain a concern and are at the mercy of the weather and war, with wholesale food prices up a sizzling 15.5% y/y in November.
After oil, perhaps the best news is that an inflation mainstay, wage growth, appears to be cresting. Big downward revisions have cast hourly compensation in a less intense light, rising a moderate 3.2% annualized in Q3 and cutting the yearly rate to a less alarming 4.0%. Alongside a belated upturn in productivity, unit labor costs rose a pedestrian 2.4% annualized in Q3, after averaging 7.6% in H1. Unfortunately, compensation looks to pick up in Q4 given firm average hourly earnings, which were up 5.1% y/y in November.
The above wage measures don’t control for compositional effects; for this, we need to turn to two other metrics. The venerable employment cost index popped 5.1% annualized in Q3 (and 5.0% y/y), juiced by the biggest increase in the public sector since 1989. By contrast, employment costs in the private sector simmered down to a 4.3% rate, the lowest in five quarters, though still up 5.2% in the past year. Meantime, the Atlanta Fed’s Wage Growth Tracker for November continued to track north of 6% y/y, though it’s off record highs in the summer. The Indeed Wage Tracker, which is based on job postings and captures trends for new hires, is also still growing strongly at 6.5% y/y, but it has decelerated sharply from a peak of 9% in March.
Like inflation itself, wage growth has topped out and might be climbing down the mountain, though the slope of the descent remains uncertain. We know from history that a tight job market will fan wages until worker shortages abate. On this front, the prognosis is concerning. While the downshift in labor demand helps, the supply side isn’t cooperating. Due to retirements and health fears, the participation rate is still more than a percentage point below pre-pandemic levels, denoting a loss of over three million potential workers. Consequently, the labor force has shrunk by 102,000 —despite a 5 million increase in the adult population. In the same 33-month period before the pandemic, the workforce expanded by 4.5 million. The number of adults not in the labor force has climbed by 5.2 million since February 2020 and continues to rise, after increasing just 346,000 in the same period before the pandemic. Data on labor force status flows suggest that more job leavers are dropping out of the workforce rather than looking for another job. And don’t count on an influx of recent retirees. A Fed paper (“The Great Retirement Boom”: The Pandemic-Era Surge in Retirements and Implications for Future Labor Force Participation) estimates that an additional 2 million people retired likely in response to the pandemic, and expects relatively few to return to the workforce as many were already 65 and older when leaving.
The net result is that since the start of the pandemic the supply of workers (the labor force) has contracted while the demand for workers (employment plus job vacancies) has soared—by either 4.2 million according to the payroll survey or 2.8 million based on the household report. Sawing off the difference suggests an excess demand for workers of around 3½ million or about 2% of the workforce. It’s this shortage that will likely keep the wage flame burning bright until the jobless rate rises meaningfully, likely by more than a percentage point.
The upshot is that, while cresting wage growth lowers the chance of a wage-price spiral, future declines could be stubbornly slow, limiting progress toward price stability.
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