We’ve gotten some good news on the inflation front lately. The latest consumer price index release confirmed that inflation cooled for a sixth straight month. Additionally, last Friday’s employment report revealed a surprising decline in the year-over-year change in average hourly earnings (AHE), shown as the orange line on the chart above.
This is an important development because wages are the “sticky” part of inflation that the Fed worries about the most. Why? Because if wages rise too quickly, it can lead to the dreaded “wage-price spiral.” This is where wages and inflation push each other higher in a self-reinforcing vortex. But as of right now, this doesn’t appear to be an issue.
To be sure, not all the wage data are as rosy as the average hourly earnings series. The Atlanta Fed’s Wage Growth Tracker, overlayed as the green line on the chart above, remains elevated at over 6%. But even here, it appears that the series has peaked and is starting to move lower.
The bottom line? Inflation is something the Fed wants to get under control. And wages are a big piece of that, so seeing the growth rate in wages decline will likely be seen as a good thing by financial markets.
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