FOMC To Be More Confident About Wage Inflation, Finally

The January jobs report includes signs of acceleration in wage gains that would encourage the FOMC to be more confident in their projections of strengthening inflation. That labor market outlook–together with underlying inflation not much below its objective already–underpins our expectation that inflation will modestly overshoot in 2019 and 2020 and that the FOMC will raise the fund’s rate somewhat above its equilibrium level. We also see today’s data as supporting our call for four rate hikes this year.  

Average hourly earnings increased a solid 0.3% in January following an also-strong (and upwardly revised)  reading in December, and the 12-month rate jumped from 2.5% (unrevised) to 2.9%. The surge in the 12- month measure is only in part due to base effects; short-horizon measures jumped even more. Along with the recent ECI data, these data reinforce the sense that wage growth is on an upward tilt, although the FOMC  will be alert to see if this trend continues in upcoming reports.  

Payroll gains accelerated in January; the 200K increase was above consensus. There was a net downward revision to the last two months’ numbers but the story remains that the trend in payroll gains is strong: Over the last six months, the average monthly pace of gains is a robust 176K.  

There wasn’t much news in the household survey. The U-3 unemployment rate remained at 4.1% for the fourth month, well below estimates of the NAIRU, while the participation rate remained at 62.7%, also for the fourth consecutive month. The broader U-6 rate edged up another tenth, to 8.2%. 

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