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NewsFlash: December 15, 2006
No wage-push inflation in sight
by Jared Bernstein, EPI senior economist
In a recent speech, Federal Reserve Chairman Ben Bernanke noted that, with energy costs moderating, the Fed would be closely watching labor costs for signs of inflationary pressures. Others have noted that inflation-adjusted wages—stagnant for the past few years—have started to grow quickly in recent months, also fueling concerns about wage-push inflation.
Inflation data released today by the Bureau of Labor Statistics reveal that Bernanke can relax.
A closely watched data series on wages—that of blue-collar workers in manufacturing and non-managers in services—has not shown signs of acceleration in recent months. To the contrary, measured on a quarterly basis, these wages have grown more slowly, as has core inflation (i.e., which excludes food and energy and is the Fed’s key gauge of price pressures).
The first chart below looks at yearly changes, the usual metric for calculating real wage changes with these data. The first bar in each month shows the yearly growth in nominal hourly wages, which has hovered around 4% since last summer without signs of acceleration. Inflation (the CPI), however, has clearly decelerated—it was growing around 4% last summer and slowed to 2% last month—and this is the source of the significant real wage gains made by these workers.
The second chart takes a closer look at recent changes by measuring nominal wage and core inflation growth over three-month intervals. Annualizing these changes, we observe that both wages and core inflation are decelerating. In August, for example, quarterly wages were rising at an annual rate of 4.7%; last month, the comparable rate was 3.1%. Core inflation has also decelerated over this period by about two percentage points.
Of course, other compensation series include non-wage components of labor costs, but employment cost data from the Bureau of Labor Statistics reveal that employer benefits costs have also decelerated sharply in recent quarters (these data show that health benefit costs are rising about 5% this year compared to 8% two years ago).
With relatively low unemployment, inflation hawks are prone to worries about wages driving up prices. These data reveal this is not a valid concern right now. Most revealing, core inflation is growing more slowly, and that should soothe even the most hawkish among us.