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The Wage Inflation Deception

Here we go again. The recent rise in wage inflation, having become an obvious fact, is increasingly being used to support the case for rate hikes – including by Fed Chairman Janet Yellen, who now sees these “tentative signs of stronger wage growth” as a harbinger of inflation.

Last year, when this notion first surfaced, we had disagreed, recalling Sherlock Holmes’s dictum that “there is nothing more deceptive than an obvious fact.”  As before, the recent details of the data lead us to question the consensus.

The chart shows that year-over-year (yoy) growth in nominal average hourly earnings (AHE) has indeed risen to a five-and-a-half-year high, though just barely so (blue line). But, as in 2014, it has risen only because growth in hours (gold line) has fallen faster this year than pay growth (purple line). We would not call this “a hopeful sign” for wage earners.

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