Wage Growth
Based on my wage equation, last January I warned to expect a sharp acceleration in wage growth in 2018. Now that wage growth has risen from 2.4% in 2017 to 3.4% in 2018, the same economic variables imply that wage growth may be flattening out. If wage growth remains near current levels it will be one less factor pressurizing the Fed to tighten.
One of the key variables driving wages higher a year ago was inflation expectations. Because there are no good long run measures of inflation expectations I use the three year trailing growth in the CPI as a proxy for inflation expectations. A year ago that measure was starting to accelerate, but now it appears to be flattening out and should be an important factor limiting wage gains.
The first sign of slower wage growth was the 3 month growth rate of average hourly earnings slipping below the year over year change in this months employment report.
Spencer:
Like the post. Any chance you can make those graphs bigger? They are hard to read for sight impaired guys like me.
Thank you.
This market measure of expected inflation shows it did surprise 2% for the first three quarters of 2018 but has retreated since:
https://fred.stlouisfed.org/series/T5YIE
My earlier comment address the 2nd sentence here:
‘One of the key variables driving wages higher a year ago was inflation expectations. Because there are no good long run measures of inflation expectations I use the three year trailing growth in the CPI as a proxy for inflation expectations. A year ago that measure was starting to accelerate, but now it appears to be flattening out and should be an important factor limiting wage gains.’
Your measure and the market measure are consistent. Now I want to comment on “limiting wage gains”. I get it that this White House is touting how much nominal wages are rising. They want us to believe that real wages are soaring. But we know that nominal wage grains overstate real wage gains when inflation is not zero. And inflation clearly is not zero even if Stephen Moore says it is. Let’s take care to also note what is happening with real wages as this White House will not.