Recent economic reports have been scrutinized for clues on inflation, especially after the August jobs report pointed to the fastest wage growth of the economic cycle.
However, current inflationary pressures aren’t as threatening when compared to historical standards. As shown in LPL’s Chart of the Day, wage growth (represented by the Employment Cost Index), among other measures remains well below levels seen during the Federal Reserve’s (Fed’s) last tightening cycle. Considering that each of the past five recessions started with wage growth in excess of 4.0%, we believe there is ample time before inflationary wage pressures can weigh on output.
“Wage growth is especially important to consider when assessing inflation in the economic environment,” stated LPL Research Chief Investment Strategist John Lynch. “Since wages can represent up to 70% of total business costs, it’s difficult to have a sustainable pricing threat without the participation of wages.”
Core readings for consumer and wholesale prices also appear more in line with price stability, not runaway inflation. Core Personal Consumption Expenditures (PCE), excluding food and energy prices, reached the Fed’s target of 2% last month for the first time since 2012. Even so, the Fed has publicly emphasized the “symmetric” nature of this target, indicating that the Fed may see other signals that inflation may not be robust as expected given the current stage of the expansion.
The core Producer Price Index (PPI), which excludes food and energy prices, grew 2.4% year over year in August, matching the pace of growth in July. Growth in the core Consumer Price Index (CPI) slowed to 2.2% over the same period. While both gauges are near multi-year highs, the current economic cycle has yet to produce historically strong price growth. Core PPI climbed as fast as 2.8% year over year in the previous tightening cycle, while core CPI increased 2.9% year over year at its peak.
While we believe pricing and wage pressures remain manageable, we’ll continue to monitor inflation data for any signs of overheating.
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