US: Another reason not to worry about wage inflation – Deutsche Bank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 14, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Research Team at Deutsche Bank, notes that the US National Federation of Independent Business (NFIB) survey was strikingly downbeat as the readings on many of the key subcomponents fell in February compared to January.

    Key Quotes

    “Moreover, there was little evidence in the NFIB survey of imminent wage and/or price pressures despite ongoing concerns that the current 4.9% unemployment rate could soon generate higher inflation. In point of fact, the percentage of small businesses planning to raise compensation fell, as did the percentage of small businesses either raising prices or planning to raise prices.

    This dovetailed with news last Friday that the year-over-year growth rate of average hourly earnings fell back into its longer-term range, declining to 2.2% in February from 2.5% in January. This was not surprising to us, because neither the employment cost index nor the labor compensation series were showing much, if any, acceleration. Each series is growing at a rate that is consistent with sub-2% core inflation.

    Furthermore, we observed earlier this year that the gain in average hourly earnings was narrowly concentrated. Without much breadth, we doubted that the earlier mild acceleration in earnings would be sustained. We have long observed that for any economic trend to be sustainable, it would have to be broad based. When gains or declines are narrowly based, the trend is oftentimes reversed.

    After briefly rising to around 45% in October 2015, the percentage of industries with earnings growth of at least 3%—the rate necessary in the Fed’s view for core inflation to rise to its 2% target—fell to just 35% as of January 2016. This is particularly striking because January actually marked the post-crisis high in year-over-year average hourly earnings growth.

    The breadth of wage growth is now only modestly above its post-recession average of 31%, and it remains well below the 50% level seen both before and during the recession, when core inflation was much higher. Therefore, our diffusion index of wage growth indicates that labor costs are likely to remain contained. If so, monetary policymakers will likely remain on hold through much of this year, until they are confident that the recent slowdown in economic activity will be reversed and the economy will be able to withstand the tighter financial conditions that would result from further rate increases.”
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