US inflation: hiding in plain sight and ready to pounce

Tom Traill - 25 October 2018

The slump in headline annual US CPI inflation from 2.9 per cent in July to just 2.3% in September has led some commentators to revert to their script that the inflationary threat remains immaterial.  This would be a false conclusion. Despite the erratic swings in the headline data, a genuine and substantive inflationary threat is hiding in plain sight. Broad spectrum measures of inflation – designed to capture the essence of a vast array of component price series and forward-looking inflation indicators – and regional Fed survey responses suggest that core inflation is ready to pounce on unsuspecting investors.

The Richmond Fed runs its own survey of manufacturers, including measures of input and output price inflation that show a dramatic ascent (figure 1). As previously noted in our research, supply chain pressures have been building for a while and in some cases have recently been exacerbated by the effects of the trade war. As the figure shows, manufacturing input price inflation tends to anticipate movements in the headline inflation rate by a few months.


Figure 1

Data source: Thomson Reuters Datastream and St Louis Federal Reserve

Increasing signs of wage inflation are beginning to show up in the US. The headline annual average hourly earnings figure edged lower in September’s data from 2.9 per cent to 2.8 per cent, thanks to a very strong comparator, twelve months prior. The October data on the other hand has a weak hurricane-affected comparator (-0.2 per cent monthly growth in Oct 2017) which means that if the next data point is equal to the average of the past 11 months then this would mean a jump to 3.2 per cent earnings inflation over the past year. The non-farm payroll release on Friday 2nd November could be an important moment in the arc of the inflationary story if wage inflation breaches three percent.

Figure 2

Data source: Bureau of Labor Statistics

Wage inflation data from the Atlanta Fed corroborates the rising wage inflationary pressures, while the Richmond Fed survey suggests that there has been a big jump in the proportion of manufacturing firms expecting to pay increased wages within the next six months. The move by Amazon to visibly raise the floor of their pay structure will obviously give pay rises to many of their staff, but also forces their rivals into a corner to match the move, giving a far greater impact.

Figure 3

Data source: Thomson Reuters Datastream

Inflationary pressures are continuing to build in the US and around the world. Headline CPI might have the biggest impact on the markets in the very short-term, but the real inflation story is buried in the undergrowth, ready to pounce!


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