What I take to be the headline series within the Atlanta Fed’s Wage Tracker was again very high during May. The 3-month moving average of the median 12-month wage growth rate, weighted to current population benchmarks, was unchanged at 6.4%. The Atlanta Fed also publishes an unsmoothed version of a concept that is close but not identical to the headline series. It rose from 5.1% last month to 6.5% this month, exactly reversing its decline this time a month ago.
In the chart below, I show these two series at a quarterly frequency to make them comparable with the core ECI, which is also a monthly series (rather than quarterly average) but produced at a quarterly frequency. Each observation of the Wage Tracker there is the quarter end value, except for the last print which is the May data. The link from the Wage Tracker to the ECI is by no means perfect, but these data reinforce the view that the ECI, which has been called the “gold standard” of wages (measurement), is not apparently set to fall steeply. Secondarily, my own measure of average hourly earnings (AHE) controlled for sector and “rank” mix-shift reinforces this theme, although it is probably less meaningful than the Wage Tracker and definitely less meaningful than the ECI, which is unfortunately produced with a long lag.
Source: Federal Reserve Banks of Atlanta and St. Louis (FRED), FH calculations
Wage Tracker is actual to May, while ECI is actual to March. Data are shown at quarterly frequency, as quarter end, except last observation which is for May.
I would shoehorn these data into my 2-stage disinflation template, if you will forgive the mixed metaphor. The first stage of the disinflation was easy and reflected Covid related “shocks,” including excessive demand stimulus, dissipating. The conventional Phillips Curve approach had nothing to say about that disinflation, just as it had little to say about the inflation itself, as I discussed in my note yesterday. Nor do we learn much about the state of the Phillips Curve or odds of “immaculate” labor market renormalization from that disinflation.
With the shock inflation in the rearview mirror, what remains is the embedded inflation resulting from the current and recent position of the labor market. The higher the wage figures are, the greater our sense of that embedded inflation, particularly with the “catch-up” effect on nominal wages now presumably in retreat. If wage growth is not slowing steeply in response to the reduced catch-up effect, then something else is presumably* going on, which – we surmise – is that the labor market is tight. And addressing that will take time and require some sacrifice of employment, according to the “standard” model, which is unreliable but perhaps the least bad way of thinking about things looking forward.
I would mention as an aside that my take here is not informed one way or the other by vacancy data. Full disclosure: I ignore them.
* My 2-stage disinflation template was crystalized by the recent Bernanke-Blanchard paper and Furman’s response to it. In fairness to Bernanke-Blanchard, they found no evidence of a wage “catch-up” effect, perhaps because inflation was not salient during the period over which their model is estimated, I would add. But full disclosure: they disagree.
