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.

 

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