Inflation risks in the US seem to have cooled off slightly over the past two months, which should be a relief for the Federal Reserve which was accused of downplaying the inflation risk. In August, the core CPI – which strips out prices from the volatile food and energy sectors – slowed to 4% from 4.3% in July (4.5% in June) on a year-on-year basis. The August print also fell short of consensus expectations for a 4.2% increase.
While the recent easing in inflation is welcome, we still think the situation in the labour market and shipping industry bears close watching. The latest numbers from the Atlanta Fed shown in our chart of the week below indicate that wage growth continues to pick up, with August wages up 3.9%, based on a three-month moving average. Shipping costs also remain sticky at elevated levels with the cost of hiring a standard container now close to ten times its pre-pandemic average.
These two factors can easily be sustained which could prompt the Fed to hasten its interest rate hikes. The Fed is usually unconcerned about transitory inflation if wage growth isn’t accelerating alongside it. However, wage inflation prints in the region of 4% usually catch the bank’s attention since it can sustain higher consumer inflation. But again “team transitory” could still argue that the recent wage inflation is because of the labour market distortions caused by Covid-related federal unemployment benefits and things will normalise as this programme expires.
Source: Federal Reserve Bank of Atlanta