Parsing the 2024 Inflation Rebound
Look past the volatility in the monthly data on wages and prices in January and February, and prior trends seem to be holding. The good news is that sitdown restaurant prices continue to normalize.
At first glance, it might seem as if the inflation problem of 2021H2-2022H1 has resurfaced. U.S. consumer prices (CPI) rose even more in February (0.44%) than they did in January (0.3%) on a seasonally-adjusted basis.
The good news is that the underlying trend is probably somewhat more benign. But it is probably still 1-2 percentage points faster than the ~2% yearly inflation rate targeted by the Federal Reserve. Average pay for most workers is still rising about 4.5-5% a year, which is still 1.5-2pp faster than the pre-pandemic average. Most wage income is spent on consumer goods and services, so absent a surge in productivity and/or the personal saving rate, the underlying inflationary trend therefore remains about 1-2pp faster than before the pandemic.
For much of 2023, the CPI rose slower than this implied underlying trend, thanks in large part to big one-off drops in consumer goods prices that seem to have stopped. The recent acceleration in observed inflation may therefore reflect a convergence to its “true”, faster value.
Looking Past the Noise in Wages
The January data on hours and pay looked funny when they were first published. The apparent plunge in the length of the average workweek alongside the apparent surge in average wages was suspicious, potentially reflecting low survey response rates and/or bad weather in much of the country. (People receiving constant salaries while temporarily working fewer hours would appear to get an hourly pay bump.)
As it happens, hours rebounded in February, while pay for nonmanagerial workers outside of retail, leisure, and hospitality1 rose at the slowest rate since August 2023, which was the month with the slowest growth in average hourly pay since February 2022. (And that in turn was the slowest month for core wage growth since January 2021.)
Comparing the level of wages in February 2024 to the level in December 2023 should strip out any measurement errors associated with the swings in hours. From this perspective, there has been no change in the underlying wage growth trend. Core wages rose at a yearly average pace of 4.6% in the last four months of 2023. Wages have grown at a yearly rate of 4.7% over the past two months. From July 2022-December 2023, core wages have grown at a yearly average rate of 4.8%.
For perspective, this subset of wages (red line below) rose at a yearly average rate of 3.1% from January 2018-February 2020.
If the extra income growth continues to translate into faster spending growth (as opposed to higher saving), inflation will not stabilize at the pre-pandemic rate unless businesses consistently increase their production of goods and services almost 2 percentage points faster than they did in 2018-2019.
The remarkable stability in nominal wage growth over the past 20 months contrasts with the impressive decline in job market churn over the same period. The share of workers quitting their job for better opportunities elsewhere is now lower than it was before the pandemic—a decline of almost two standard deviations since mid-2022. Similarly, the number of open positions relative to the number of workers in employment is now the same as it was in 20182, which represents a drop of three standard deviations from mid-2022.
This has not flowed through to high-frequency measures of wage growth.