The recent wage growth has been mainly driven by productivity gains, which are not inflationary. The growing share of performance-based compensation is an indication of a direct link between compensation and productivity. Additionally, despite the strong job market and low unemployment rate, there is still considerable slack in the labor market. The labor force participation rate remains at 63%, the lowest level since 1979. A strong job market will draw more people back to the labor force, which will reduce wage pressure. Given the competitive labor market and economy, moderate wage increase is unlikely generate much inflation pressure.

*Note: PCE inflation – YOY change of Personal Consumption Expenditures Excluding Food and Energy; Average Hourly Earnings Growth – YOY change of Average Hourly Earnings of Private Sector Production and Nonsupervisory Employees.

Henry Ma is the President & CIO at Julex Capital Management, a participant in the ETF Strategist Channel.

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