Weekly Economic Commentary

Consumer price inflation was moderate in 2019, as gasoline prices stopped falling. The tight labor market has led to some upward pressure on wages, but constraints have dampened output is some areas. Growth in real (that is, inflation-adjusted) hourly earnings has slowed sharply in recent months, which ought to dampen consumer spending growth.

The Consumer Price Index rose 2.3% in 2019, both overall and excluding food and energy. The year-over-year increase in the core PCE Price Index, the Fed’s chief inflation gauge, has been trending 0.6 to 0.7 percentage points lower (1.6% y/y in November, December data due January 31). Why the gap? The two use mostly the same components, but the weights and formula differ. The PCE accounts for the substitution of cheaper goods (among similar goods) when there is a relative price change (such as between different types of apples). In medical care, the CPI only covers out- of-pocket expenditures. The PCE Price Index includes employer provided insurance.

The Fed’s goal is 2% inflation in the PCE Price Index, and it has fallen short of that goal in recent years. There is concern that if the Fed continues to fall short of the 2% goal, inflation expectations will fall below 2%, making it harder for the Fed to reach the 2% goal. Currently, monetary policy attempts to balance the risk of prolonged sub-2% inflation with the risk of inflating an asset bubble. No change in monetary policy is expected until there is a material change in the economic outlook.

Scott Brown
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Despite a tight job market, wage gains have remained relatively moderate overall. The Phillips Curve, the trade-off between lower unemployment and higher wage inflation, is not dead. However, there’s a growing consensus that the curve is relatively flat around the natural rate of unemployment and only picks up sharply when the unemployment rate is more than a full percentage point below the natural rate. Views on the natural rate differ, and the rate ought to vary over time, falling as the population ages. Federal Reserve officials pegged it at 3.5% to 4.5% in December, with most at around 4.1%). State and local minimum wage increases are expected to boost average hourly earnings in early 2020, but moderately (the federal minimum wage remains at $7.25, unchanged for over a decade).