Fed Chair Janet Yellen has stressed the importance of wage inflation in influencing the Federal Open Market Committee's decision to start raising interest rates. April's average hourly earnings for all workers rose just 0.1% month-over-month and 2.2% year-over-year. She has said that she would like to see 3% to 4% wage gains or be reasonably confident that they are heading in that direction. The three-month change in this measure of wages settled down to 1.8% (seasonally adjusted) during April from 3.6% during March. Nothing to get Ms. Yellen too excited, which seemed to get the stock market very excited on Friday.
However, Q1's Employment Cost index for wages and salaries in the private sector -- a more comprehensive measure of wages than the AHE -- rose 2.7% year-over-year, the highest since Q3 2008. The Phillips Curve, which posits an inverse relationship between wage inflation and the unemployment rate, is actually working much better with the ECI than the AHE measure of wages, especially compared to the short-term unemployment rate.
Ms. Yellen is a big believer in the Phillips Curve. She said so in an important March 27 speech: “A substantial body of theory, informed by considerable historical evidence, suggests that inflation will eventually begin to rise as resource utilization continues to tighten. It is largely for this reason that a significant pickup in incoming readings on core inflation will not be a precondition for me to judge that an initial increase in the federal funds rate would be warranted. With respect to wages, I anticipate that real wage gains for American workers are likely to pick up to a rate more in line with trend labor productivity growth as employment settles in at its maximum sustainable level. We could see nominal wage growth eventually running notably higher than the current roughly 2% pace.” In a footnote, she cited four studies for “recent evidence on the relationship between labor market slack and wages.”
Source: Ed Yardeni — Ed Yardeni is the president and chief investment strategist of Yardeni Research Inc., a provider of independent investment strategy and economics research for institutional investors.