October Inflation Data: The Tide May Be Turning

The absence of wage gains as the unemployment rate halved from 10% to 5% since 2009 has been a continuing conundrum. But on 6 November, the Labor Department reported that average hourly earnings for private employees rose 0.4% month-over-month – a 2.5% year-over-year rate that was the highest reading since 2009. Then, on Tuesday, October’s Consumer Price Index (CPI) report provided evidence that this is feeding through to consumer prices: Inflation in core services ex shelter – which tend to be labor intensive – rose 0.39% month-over-month.

Overall, U.S. consumer prices firmed 0.2% month-over-month in October, the Labor Department reported, following two months of declines. Core prices, which exclude volatile food and energy prices, rose 0.2% during the month, or 1.9% year-over-year.

Some of the strength in services inflation came from an outsize 0.85% month-over-month gain in medical services inflation. It is possible there is some noise in that data since medical inflation in October has large seasonal adjustments.

Still, the other major services categories – transportation (up 0.22% month-over-month), recreation (up 0.36% month-over-month) and education and communication (up 0.37% month-over-month) – all posted inflation gains above their recent history.

While one month does not a trend make, the October data move the needle in resolving the conundrum of the absence of wage pressures amid falling unemployment. We continue to point to inflation in services ex shelter as the key for the Fed to reach its inflation target.