Personal Income, Employment Cost and Implications for Inflation

Monday morning, Rosenberg, in his eponymously named economic commentary “Breakfast with Dave”, continues to point out that deflation is a bigger risk currently than inflation. He states,

There is no more significant source of inflation than the U.S. labour market and we found out on Friday that total employment costs slowed to just +0.4% in Q3 and the YoY trend is extremely tame, at +1.9%. Wages came in at +0.3% sequentially and just +1.5% on a YoY basis.

By examining today’s Personal Income and Outlays data and Friday’s Employment Compensation data (cited by Rosenberg) let’s see what they are indicating about inflation.

First of quick summary of the two reports; As of Q3’10, quarter over quarter growth rate in Employment Compensation has slowed to .4% from .5% and .6% in the prior two quarters. Consensus for Q3 was .5%. Wages and Salary quarter over quarter % change was .45%. It has remained in a tight range, from .36%-.45% from the past 5 quarters. There continues to be no strong rebound in wage increases with employment costs remaining under 2% year over year.


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Today’s personal income report shows personal income down .1% month over month versus a consensus of .3%. Year over Year growth was 3.1%, which is less than half the 60 year average.

What does the data tell us about the future for inflation, as measured by CPI. Historically, year over year growth in Employment compensation has a .71 correlation to next year’s CPI % change. The correlation for Personal Income is .76. Constructing a linear regression based on the two correlated inputs we can forecast CPI for Q4 ’10 – Q3 ’11.


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As can be seen in the above table and chart both the current growth rates in employment costs and personal income imply subdued inflation for the next 4 quarters. The Federal Reserve is doing its best through QE2 to spur inflation however based on these current data points, the historical example and margin compression it will be unlikely to succeed in the near term.


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