Inflation pressures in America moderated last month, according to new data from the Bureau of Labor Statistics. Specifically, the producer price index (PPI) for final demand, a key gauge of wholesale cost changes, rose at an annual rate of 1.9 percent in February, a 20-month low. After stripping out the volatile food and energy components, “core” PPI increased by 2.5 percent during the past twelve months, below expectations. Similarly, the consumer price index (CPI) for all urban consumers, a popular metric of household inflation in America, increased at an annual rate of 1.5 percent in February, and core CPI lifted by 2.1 percent.
Continued drivers of consumer inflation last month included apparel and shelter costs, while the prices for automobiles, prescription drugs, and medical care were notable detractors. The monthly rise in core CPI was half the increase analysts anticipated and the annual gain was the slowest pace of growth recorded in a year. Although not the Federal Reserve’s preferred measures of inflation, the latest CPI and PPI reports will help officials justify a “patient,” data-driven approach to monetary policy in 2019. More importantly, the continued cooling in household price pressures combined with the recent acceleration in wage growth have resulted in a 1.86 percent year-over-year gain in Americans’ real (inflation-adjusted) average hourly earnings.
That is the best reading since November 2015 and likely a side-effect of greater productivity growth. Indeed, when worker compensation increases businesses can raise selling prices to aggressively defend profit margins or instead keep prices low to try to gain market share. The latter can be more easily achieved by boosting the productivity (output per hour) of the existing workforce through investments in new equipment, technology, and employee training. The recent tax cuts helped many U.S. companies move forward the timetables for such capital spending initiatives, and continued wage growth will only increase the importance of investing in productivity.
Sources: Econoday, U.S. DoL, Bloomberg, Twitter, FRBSL
Post author: Charles Couch