Price Inflation and Wage Inflation

June 9th, 2014 at 7:17 pm

Yes, it’s understood by many who track such matters that price inflation has been quite low, a symptom of persistent slack in the economy, especially in the job market.  But have you looked at wages or compensation?

Well, I have.  The figure below plots a pretty long time series of annual changes in the core PCE price index and the Employment Cost Index, a measure of nominal average compensation costs–wages plus benefits–faced by employers (and adjusted for employment shifts across industries).

The core PCE has wiggled around between one and two percent for over ten years!  (This has led some unenlightened souls to suggest to me that we must have been at full employment all those years…you know who you are!)  But the comp measure is stuck at an all time low of around 2%, year-over-year.  BTW, that’s about where overall (as opposed to core) inflation is running, implying flat real compensation growth–and this is the average.  The forces of inequality tend to pull up the average relative to the median.

This is not just an idle observation.  There are those among us who have suggested that the Federal Reserve might be wise to factor nominal wage inflation, of lack thereof, into its thinking about wind-downs and liftoffs.  Chair Yellen herself has said in the recent past: “the low rate of wage growth is, to me, another sign that the Fed’s job is not yet done” and “low nominal wage inflation was also viewed as consistent with slack in labor markets.”

The unemployment rate is biased down due to labor force exiters.  Price growth is low and apparently “well-anchored.”  We’re still a ways from full employment.  All good reasons to considering adding wage trends (and I think the ECI is a strong candidate) to the mix of indicators guiding the Fed’s next move–or lack thereof!


Sources: BEA, BLS

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